Exclusively from Michael Pettis’ newsletter:
1. The regulators will try to come up with different measures that maintain high levels of growth without causing significant deterioration in the country’s credit position. These include measures to keep investment levels high while rechanneling them into productive uses, to maintain sufficient liquidity and credit growth, including through the external account, and to strengthen balance sheets without simply shifting debt onto the central government’s government balance sheet. Nearly all the new policies or innovations are simply variations on this process.
2. None of these measures are likely to succeed except under specific conditions that either haven’t yet been met or have been insufficiently met. Investment levels are simply too high, and they must drop rapidly. All historical precedents make this very clear, as does a fundamental understanding of the Chinese growth model, which resembles the models underlying nearly every other period of miracle growth of the past 100 years. This model, following Alexander Gershenkron’s analysis of rapid growth in developing, or what he called backward, economies, involves forcing up the national savings rate by constraining the growth in household income and centralizing the investment process.
