(This interview with Michael Pettis, professor at Peking University’s Guanghua School of Management, a specialist in Chinese financial markets, was published in DNA edition dated January 10, 2011.)
China’s headline inflation numbers have had global financial markets bracing for tightening measures in what they consider ‘the engine of global economic growth’. But Michael Pettis, professor at Peking University’s Guanghua School of Management, a specialist in Chinese financial markets and a senior associate at the Carnegie Endowment for International Peace, reasons that, in fact, the bigger risk in China in 2011 is that it lacks adequate growth drivers – beyond investment-led growth. And that investment-driven growth is feeding surpluses into a world that is, in fact, experiencing anaemic demand, while also feeding malinvestment in China. To that extent, China isn’t the “locomotive of global economic growth,” and a ‘new normal’ in GDP growth rates, which is well below trendline, would be good for China and for the world, Pettis argues in an interview to DNA Money’s Venkatesan Vembu. Excerpts:
Let’s talk of China in 2011: is inflation or the lack of growth drivers the bigger risk in China?
I would say it’s the lack of growth drivers – or rather that the main growth driver is still going to be growth in investment. I know that there’s a great deal of worry about inflation and if inflation continues rising, it creates real serious problems. But I also believe that in a financially repressed system like China, where interest rates are kept very low, there’s a very weird inflation dynamic. Inflation becomes sort of self-dissipating: as inflation rises and interest rates fail to follow, the real rate declines and the deposit rate is pretty much negative. That has two effects: on the consumption side, it further reduces household income share of GDP because, with such high savings, the return on your savings should be an important part of your total income. But with the return actually negative, it puts significant downward pressure on your total income. I would argue that low household consumption in China is a function of low household income as a share of GDP. Anything that reduces that household income share puts downward pressure on consumption. Continue reading