In recent days, someone (anyone!) in Australia’s economic elite finally engaged with Michael Pettis in a debate on China. It was Stephen Grenville, a former Deputy Governor at the RBA and now Lowy Institute doyen. Grenville argued that:
Leading the growth pessimists is Michael Pettis, who has a bet with The Economist that growth will average no more than 3.5% for the decade. China’s most recent annual growth is twice this pace, close to forecast. How feasible is a continuation of this expansion?
It doesn’t require any extra demand from a higher export surplus. China’s surplus has already fallen to a sustainable 3% of GDP and China’s current rate of growth has been achieved with imports growing faster than exports. What about the seemingly outlandish proportion of GDP going into investment? In fact by international comparisons of countries going through the ‘growth spurt’, China’s 50% investment ratio doesn’t look that unusual. It matches Singapore in 1978-88 and is not much higher than Japan, South Korea and Thailand in their high-growth periods.
…If Pettis wins his bet with The Economist, the world economy will indeed be a dismal place for the medium term. But so far he has had to tweak his forecasts to keep them consistent with the unfolding actual record of higher growth (‘forecast early and forecast often’). Earlier this year Pettis said‘average growth in this decade will barely break three per cent’. Given the growth already achieved in the first few years of the decade, this would have implied almost no growth at all for the rest of the decade. In a more recent blog post he talks about China’s growth slowing ‘even to 3%, as I expect it will within the next few years…’. So he’s no longer talking about the whole decade.
And Pettis responded:
Stephen Grenville calls me the leading pessimist among China watchers but I would much rather be described as a sceptic. For many years, China bulls have made a series of excited claims about the success and sustainability of the Chinese growth model that seemed too often to defy both historical precedent and common sense. My analysis has largely consisted of pointing this out.
…Although my long-term growth expectations for China may be lower than that of most other economists, they don’t imply a gloomy outcome for China. Much slower economic growth is a necessary consequence of China’s rebalancing, but since rebalancing requires that household income growth exceed GDP growth by a substantial margin, the wealth of ordinary Chinese households can continue growing at enviable rates. This, and not reported GDP, is what really matters.
Nor is rebalancing bad for the rest of the world (although hard commodity producers will suffer). The idea that China is the global engine of growth is based on confused arithmetic. What the world needs from China is not more growth. It needs more net demand, and a rebalancing China, even with much slower growth, will provide just that.
I suggest a visit to the Lowy Interpreter to read both in full is worth your time. But for what it’s worth, here is my take:
I agree that China possesses great growth potential via productivity. But Grenville doesn’t mention debt at all, which is the key component of why Pettis sees the 50% investment ratio as unsustainable.
Grenville is also wrong when he says if Pettis is right then the world will fall apart. The whole point of the Pettis thesis is that the growth model must shift from creating value destroying growth for its own sake to growth aimed at increasing household incomes. Ending financial repression.
In that event, Pettis argues that China can consume for the ages, which will be fantastic for the major global imbalance that exists between China and the US. It will just suck for Australia as everyone else heals.
The attempt to corner Pettis on the bet with The Economist is beneath the debate.
As in the case of every other member of Australia’s elite, Grenville is unable to conceive of successful Chinese growth that isn’t dependent upon Australian resources.
