Avoiding the Fall

Avoiding the Fall: China's Economic Restructuring

MICHAEL PETTIS
Copyright Date: 2013
Pages: 172
https://www.jstor.org/stable/j.ctt6wpk55
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  • Book Info
    Avoiding the Fall
    Book Description:

    The days of rapid economic growth in China are over. Mounting debt and rising internal distortions mean that rebalancing is inevitable. Beijing has no choice but to take significant steps to restructure its economy. The only question is how to proceed.

    Michael Pettis debunks the lingering bullish expectations for China's economic rise and details Beijing's options. The urgent task of shifting toward greater domestic consumption will come with political costs, but Beijing must increase household income and reduce its reliance on investment to avoid a fall.

    eISBN: 978-0-87003-408-4
    Subjects: Political Science, Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. FOREWORD
    (pp. vii-viii)
    Douglas H. Paal

    Some experts and markets continue to be bullish about the Chinese economy, expecting that high rates of growth will continue indefinitely. But that focus on numbers obscures stark realities.

    While the country certainly achieved remarkable growth over the last three decades, success came with significant costs. Like other rapidly developing Asian economies, China relied on repressed household consumption to make modernizing investments. Its economic model distorted interest rates, the currency, and even legal structures. And it led to burgeoning debt that is becoming increasingly difficult to finance. The time has come for China to adjust its model to the new...

  4. CHAPTER 1 THE LIMITS OF THE CHINESE GROWTH MODEL
    (pp. 1-20)

    Beijing began to reform the Chinese economy in the late 1970s and early 1980s. Since then it managed to generate such spectacular growth for three decades that, with the possible exception of postwar Japan, South Korea, and Taiwan, no comparable precedents exist. Even these limited precedents may understate China’s achievement.

    Japan’s success occurred in a country that had been economically destroyed by war but that had been socially and culturally an advanced economy since at least the end of the nineteenth century. It was already the sixth-largest manufacturing nation by the 1920s, surpassed only by the United States, Germany, Britain,...

  5. CHAPTER 2 CHINA’S DOMESTIC IMBALANCES
    (pp. 21-44)

    In order to determine what policy choices China faces, I started with the two assumptions listed in the preceding chapter. The first assumption is that the fundamental imbalance in China is the very low GDP share of consumption. This low GDP share reflects a growth model that systematically forces up the savings rate mainly by repressing consumption growth (actually by repressing household income growth, which effectively accomplishes the same thing). As a consequence of this consumption-repressing growth model, Chinese growth is driven largely by the need to keep investment levels extraordinarily high.

    Why? Because for any economy there are three...

  6. CHAPTER 3 IS OVERINVESTMENT A PROBLEM?
    (pp. 45-60)

    The second of the two key assumptions that I listed in chapter 1—that China will necessarily rebalance in the next few years—is, I think, very plausible. In fact, over the long run it is actually more than just plausible. It is an arithmetical certainty, because it can be violated only if China has unlimited borrowing capacity and the world has unlimited appetite for rising China trade surpluses. Of course, neither of those possibilities is realistic.

    Where some analysts might disagree with my second assumption is on the issue of timing. Some analysts continue to argue that there isn’t...

  7. CHAPTER 4 MONETARY POLICY UNDER FINANCIAL REPRESSION
    (pp. 61-76)

    Before continuing with the discussion about why China must and will rebalance its economy toward a greater consumption share of GDP, it is worth digressing for an examination of the consequences and implications of financial repression in China. Financial repression is not only at the heart of China’s rapid growth and its economic imbalances, but it also explains a number of otherwise puzzling aspects of the Chinese development model. In many ways this may be the most theoretically interesting chapter of this book, but readers who have no interest in monetary policy may skip it because its relevant conclusions will...

  8. CHAPTER 5 HOW WILL CHINA REBALANCE?
    (pp. 77-98)

    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...

  9. CHAPTER 6 THE MECHANICS OF REBALANCING
    (pp. 99-118)

    In chapter 5 I argued that if we accept the argument that China must, and will, rebalance its economy by reducing its reliance on investment and increasing its reliance on consumption, and if we further accept the claim that the main explanation for China’s extraordinarily low consumption share of GDP is the extremely low household income share of GDP, then it follows that China can rebalance only by increasing the household income share of GDP.

    To put it another way, after thirty years in which the household share of GDP has contracted and the state and corporate share has expanded...

  10. CHAPTER 7 HOW TO BE A CHINA BULL
    (pp. 119-144)

    In the many debates I have had on the subject of China’s adjustment, and in conversations with other senior officials, my counterparts have largely constrained themselves to three arguments to support claims of continued very high growth in China. First, they presented historical data showing rapid Chinese growth rates in the past three decades and proposed that this was evidence of rapid Chinese growth rates in the next two decades.

    Second, they asserted that because past predictions of failure have all turned out to be wrong (a widespread misperception, by the way, to which I will return), future predictions must...

  11. APPENDIX WHAT HAPPENS IF CHINA REVALUES THE RENMINBI?
    (pp. 145-150)
  12. INDEX
    (pp. 151-158)
  13. ABOUT THE AUTHOR
    (pp. 159-160)
  14. CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE
    (pp. 161-162)
  15. Back Matter
    (pp. 163-163)