Naked Capitalism has the potentially important article Michael Pettis: If We Don’t Understand Both Sides of China’s Balance Sheet, We Understand Neither.
China is a dynamic and unbalanced economic system entering into something that we might grandly call a “phase shift”, or less grandly the rebalancing process, and that it is doing so with a great deal of debt structured in a highly inverted way. Anyone who sees China this way would have been able to predict not so much the specific shocks, panics, and credit crunches that we have experienced, but rather that we would of necessity experience a series of very similar shocks.
As I read this the author seemed to be displaying an annoying propensity to dance around the issue without making it clear to me what he meant. Perhaps that is only because I didn’t understand his terminology rather than the fact that he refused to give me the specifics that would have made it clear to me.
I found one tantalizing sentence that hinted to me what this article was about.
I believe, however, that without a massive and fairly unlikely transfer of wealth from the state sector to the household sector, the average Chinese GDP growth rate under Xi Jinping cannot exceed 3-4%.
Nowhere else did he explain which balance sheets were out of whack, inverted, nor did he ever mention again the sector issues, let alone the specific state and household sectors. Over and over he talked about too much debt, but never said which sector was too much in debt.
Maybe a finance expert can read this, and explain to me the golden nugget of what this article is trying to tell me. I have a strong feeling that there is a golden nugget to be found.
I think there may be a relation between this article and a conundrum for the Chinese economy that I always wondered about. If the Chinese economy depends on massive exports, how is this going to succeed when all the buyers of Chinese products run out of the money to buy these products? The answer seemed to me to be having domestic demand in China sop up the products for which China could no longer find foreign buyers. Is this article saying that the state is keeping too much of the wealth, and not transferring enough of it to the private sector to spur private domestic demand? If the author would only say this, and talk about specifics on solving this problem, perhaps his disagreements with other experts could be resolved. I have a feeling that his disagreements arise because the other experts can’t figure out what he is getting at either.
I have posted that last paragraph as a comment on the article on Michael Pettis’ blog.
My comments on the Pettis blog have finally brought a response. It was quite vehement. It does confirm that I have little idea of what this article is talking about. Pettis is aware of what being sovereign in your own currency means. If I want to understand his blog post, I just need to buy his book, and also read the posts on the blog over the last few years. I may do some of that as time permits.
As I read the developing discussion on Michael Pettis’ blog I am less and less suspecting that there is the nugget and more and more suspecting that the author does not know about Modern Money Theory. I have yet to see a clarification that he knows the significance of the difference between public debt (debt owed by the government) and private debt (debt owed by private citizens). He seems to lump them together in inappropriate ways. He doesn’t seem to recognize the significance of the difference between France that has tied itself to the Euro, and China that would be completely sovereign in its own currency if it stopped trying to peg it to the dollar.
With this lack of understanding, I am not sure he will ever come up with an explanation of how to use apples to cure problems with oranges.
Ironically, curing problems with oranges by using apples is an appropriate analogy for the solution to the economic problem, but not if you think apples and oranges are the same thing.