RealVision interview (just came out today) about China bull expert (Pettis) vs China bear expert (Bass) debating. 3, 2, 1, go!
Also gives some color as to the current state of China's economy, and probably why Xi Jinping was so harsh on Ant.
Key points:
1. China's GDP growth is not an apples-to-apples comparison with other countries, because their banks don't write down bad assets; they just keep rolling the debt forward indefinitely. If those bad assets were impaired as per international standards, they could be up to 40% below official data.
2. China's phenomenal growth since reopening its economy in the 70's was largely because its economy badly needed repairing at the time, after 50 years of anti-Japanese war, civil war and Maoism - so if you just threw money at something it would be productive. Now it has reached a plateau with regards to investment-based growth, and needs to tackle institutional reform - i.e. reform in regulation, education, innovation, etc - in order to spur the next paradigm of growth. That is going to be much harder for an authoritarian government to achieve than simply throwing money at the problem, because the constituencies which benefited the most from investment-based growth and have ended up the most powerful today, i.e. businesses/municipalities, are unlikely to want to let go of that power in order to allow that change to happen.
3. Households tend to be the main driver of GDP growth, because the rich tend to conserve most of their wealth rather than spend it. Most countries have 75% of their wealth owned by households, with the remaining 25% of wealth split between businesses and government. China's split of wealth between the two is 50:50. And even among the households, most of the wealth is concentrated among wealthy households. So without the aforementioned institutional reforms, which the rich and powerful are likely to resist, continued GDP growth is going to be that much harder to achieve.
4. Capital controls are ultimately ineffective, because wealthy Chinese have learned ways to overcome it. E.g. buy subsidized oil in China, send it by the truckloads to the Thai border, bribe the guards there, and sell the oil at spot prices in Thailand. This will continue to put pressure on the RMB exchange rate, which will further deplete already depleting reserves and restrict monetary policy autonomy, i.e. the impossible trinity dilemma.
5. In the 60's, everyone thought the Soviet Union would become a superpower. In the 80's, everyone thought Japan would become a superpower. At the time, they were both economically robust and technologically equal to the USA. But their growth was mainly driven by investment capital not human capital, which meant that their high debt levels needed to get higher in order to sustain growth. China is in the same position today.
6. Conclusion: China still has levers to pull, and in the short-term there is little risk of a crisis-level collapse. But in the long-term it may end up becoming like Japan, with many lost decades to make up for the managed growth of the past.
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Dueling Perspectives On China's Economic Reality (w/ Kyle Bass and Michael Pettis) | Real Vision
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RealVision interview (just came out today) about China bull expert (Pettis) vs China bear expert (Bass) debating. 3, 2, 1, go!
Also gives some color as to the current state of China's economy, and probably why Xi Jinping was so harsh on Ant.
Key points:
1. China's GDP growth is not an apples-to-apples comparison with other countries, because their banks don't write down bad assets; they just keep rolling the debt forward indefinitely. If those bad assets were impaired as per international standards, they could be up to 40% below official data.
2. China's phenomenal growth since reopening its economy in the 70's was largely because its economy badly needed repairing at the time, after 50 years of anti-Japanese war, civil war and Maoism - so if you just threw money at something it would be productive. Now it has reached a plateau with regards to investment-based growth, and needs to tackle institutional reform - i.e. reform in regulation, education, innovation, etc - in order to spur the next paradigm of growth. That is going to be much harder for an authoritarian government to achieve than simply throwing money at the problem, because the constituencies which benefited the most from investment-based growth and have ended up the most powerful today, i.e. businesses/municipalities, are unlikely to want to let go of that power in order to allow that change to happen.
3. Households tend to be the main driver of GDP growth, because the rich tend to conserve most of their wealth rather than spend it. Most countries have 75% of their wealth owned by households, with the remaining 25% of wealth split between businesses and government. China's split of wealth between the two is 50:50. And even among the households, most of the wealth is concentrated among wealthy households. So without the aforementioned institutional reforms, which the rich and powerful are likely to resist, continued GDP growth is going to be that much harder to achieve.
4. Capital controls are ultimately ineffective, because wealthy Chinese have learned ways to overcome it. E.g. buy subsidized oil in China, send it by the truckloads to the Thai border, bribe the guards there, and sell the oil at spot prices in Thailand. This will continue to put pressure on the RMB exchange rate, which will further deplete already depleting reserves and restrict monetary policy autonomy, i.e. the impossible trinity dilemma.
5. In the 60's, everyone thought the Soviet Union would become a superpower. In the 80's, everyone thought Japan would become a superpower. At the time, they were both economically robust and technologically equal to the USA. But their growth was mainly driven by investment capital not human capital, which meant that their high debt levels needed to get higher in order to sustain growth. China is in the same position today.
6. Conclusion: China still has levers to pull, and in the short-term there is little risk of a crisis-level collapse. But in the long-term it may end up becoming like Japan, with many lost decades to make up for the managed growth of the past.