Michael Pettis on China’s new down is up economic model

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Via FTAlphaville comes Michael Pettis, finance professor at Peking University and a senior fellow at the Carnegie-Tsinghua Center.

Ever since May, when President Xi Jinping first introduced the concept of a “dual circulation” economic model, analysts who follow the Chinese economy have been struggling to understand exactly what the Chinese leadership has committed to. From the many subsequent formal references that have followed, it seems that Beijing’s new economic strategy calls for the country to continue to expand domestic production for exports (“international circulation”) while shifting the economy towards a greater relative emphasis on production for domestic consumption (“internal circulation”).

In principle this makes sense. Once it had closed the underlying gap between desired investment and actual investment — which it probably did in the early 2000s — China needed to base growth on domestic demand driven by rising wages, rather than depending on exports or on increasingly non-productive investment. Because China has relied so much on the latter, its debt burden has soared to one of the highest in the world.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.