Avoiding the Fall: China's Economic Restructuring by Michael Pettis

Author:Michael Pettis [Pettis, Michael]
Language: eng
Format: epub, mobi
Publisher: Brookings Institution Press
Published: 0101-01-01T00:00:00+00:00

CHAPTER 5

HOW WILL CHINA REBALANCE?

We need to keep the impact of financial repression in mind in understanding the Chinese growth model. It is a fundamental cause of China’s rapid growth in economic activity and its extraordinary imbalances. To return to the narrative of chapters 2 and 3, the key vulnerability of my argument that China has no choice but to rebalance its economy within two to three years, and an argument that hinges on understanding the role of financial repression, is whether or not we believe that investment in the aggregate is being misallocated in China and, if so, whether this has been true for very long.

In chapter 3 I argued that there are very strong conceptual reasons for assuming a powerful tendency within China to misallocate investment. This was always likely to be one of the automatic consequences of China’s repressed financial system, which after so many years of delivering robust growth had shifted toward delivering growth driven by capital misallocation. Under these conditions, in which the state has unrestricted access to national savings and few constraints on how they are allocated, no economic system in history has failed to experience capital misallocation. Not to see the same in China would be an astonishing new development in economic history.

But there are additional reasons for believing that capital has been massively misallocated in China. Of course, capital misallocation can never be proven until well after the fact, especially when capital is spent on large-scale infrastructure projects, whose ultimate value is very sensitive to assumptions about future growth. But if capital had been misallocated on a significant scale in China during the past several years, we would expect to see certain kinds of circumstantial evidence.

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