A China Skeptic

October 30, 2011 8:59 PM

There is this perception that the only China skeptics are foreigners. Let me tell you that is completely wrong. The debate within China is much more interesting and much more ferocious than the debate outside of China about problems with the growth model. Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. Here he talks about China's economic prospects.
posted by storybored (25 comments total)

His thoughts on the global economy in the next decade.
posted by storybored at 9:02 PM on October 30, 2011

I listened to that when it came out- excellent for any China watcher.

I also transcribed Tyler Cowen's thoughts on China from April 2011 when he sat down for Tea with the Economist.
posted by gen at 9:55 PM on October 30, 2011

The podcast mp3 is available here: http://cfapodcast.smartpros.com/AIC2011/AIC11_Pettis.mp3
posted by gen at 9:57 PM on October 30, 2011 [1 favorite]

Also available on itunes here....
posted by gen at 10:08 PM on October 30, 2011

This is awesome. The part about SEO's in effect taxing households and passing that off as profit is great analysis.
posted by grubby at 10:10 PM on October 30, 2011

er, SOE's. Trying to post while doing web work. Fail.
posted by grubby at 10:11 PM on October 30, 2011

Interesting enough but at almost every point I had a nit-pick and I think he's missing a larger picture. Being a lazy sod, I'll not bother to try to say what that is, but here's a few of my random observations, as much to get a discussion going as pretending I really know what I'm talking about.
It's long been a given that there's raging debate in policy circles. That's partly because there's been a swathe of returning foreign-educated economists over the past couple of decades (many funded by the Ford Foundation and the like) who came back more neoliberal than the neoliberals. They've had the upper hand for a while (though never free rein), but given the global failure of the ideology and Chinese domestic troubles, other voices are coming to the fore. The policy changes he expects with the incoming new leadership next year may well be in a far more interventionist mode aimed a kind of social balancing that is a reaction to that lost decade of stagnant wage growth. This might well have some of the effects he wants to see in consumption (I'd imagine the new rural health insurance policy would have some impact there, for instance) but maybe won't be framed in quite the terms I am presuming he's talking in. (It also might not happen at all from some things I hear, as obviously this is all hotly contested too; sadly my direct line to Zhongnanhai doesn't seem to work).
I'd read about the local government debt problem in the Chinese press back in the early 2000s; that was three sample provinces as I recall. AFAIK Victor Shih's work was more to extend that nationwide, but anyway I think the key point is this wasn't a surprise domestically - on the grounds that if I'd heard of it we can be fairly sure the State Reform and Development Commission had. Given the dilemma the centre has in controlling the grassroots and the obvious persistence of the problem, the fact it's only come onto the radar for some now doesn't automatically discount their analysis, but OTOH that we've stumbled along with this crisis for at least a decade suggests it may not be quite the killer he thinks either.
I think he's missing a few tricks in his analysis of the SOEs too - I'm sure they do look as horrible as he thinks by the lights of conventional economics, but they're also the largest contributors to the state income he reckons they get more of than they earn. The private sector pays in far less and many transnationals hardly anything a all. That comes back to his earlier point about this all actually having happened before, which again is sort of true but then again not in somewhere so large and not in a post-socialist economy.
On preview, so to my mind, this bit about the SOEs being a tax on households is a partial analysis. The entire shoddy edifice has been built on extracting immense surplus value off Chinese workers, the SOEs are one of the few sectors were a bit of it dribbles back (via several grasping back-hands and the rest) to fund the few social programmes we have.
posted by Abiezer at 10:15 PM on October 30, 2011

One of the leading foreign China skeptics is Jim Chanos, who became famous for being one of the key people who blew the whistle on Enron. Here's a good summary where he debates someone with a more positive outlook (he starts speaking at around 4:00). Watching for egregious balance sheet inaccuracies is his bread and butter and makes a really convincing argument that China may not be facing a soft landing for its property bubble. He's been making an interesting point lately that a lot of their foreign reserves are not free equity, they have liabilities of RMB, and that a lot of that will be eaten up with their up-to-40% bad bank debts, led by a post-2008 China property bubble.

Bad debts are piling up as of 2-3 months ago, this is a very recent phenomenon, and creating bizarre headlines:

In recent months, at least 90 business executives from this coastal city [Wenzhou], a one-hour flight south of Shanghai, have disappeared because of mounting debts and impending bankruptcies, according to a local government report.

This may become the first real unchecked capitalist decline in property values with huge participation in the middle class for China. The social impacts should not be underestimated.
posted by amuseDetachment at 10:32 PM on October 30, 2011

A friend used to examine chinese balance sheets for a us regulatory agency. The chinese firms would all be repped by us law firms. They'd bring out one set of books, highly favorable to the company. The regulators would say, ok we think these aren't accurate. Next would come what appeared to be more reasonable books. Finally, the regulators would say "let's see the real books." And the Chinese would oblige and out would come a frankenstein monster. The books were a mess. The companies often did not even know if they were making a profit. My friend said it happened a lot.

The internal controls are not good at all. This will set china back some time.
posted by Ironmouth at 10:42 PM on October 30, 2011 [2 favorites]

The internal controls are not good at all. This will set china back some time.

See Sino-Forest Corp.
posted by gen at 10:46 PM on October 30, 2011

In case it takes anyone else as long to puzzle out as it did me -- I'm pretty sure that SOEs = state owned enterprises.
posted by msalt at 12:19 AM on October 31, 2011 [3 favorites]

Back in 93 I spent some significant time in Moscow and saw first-hand how poorly the transition to capitalism was handled. The upshot is that a strong middle class was never created and the country seems constantly on the brink of another Bolshevik Revolution.

Compare this with China. Yes, there are significant issues regarding their accounting, several dead cities and continued human rights abuses. But a strong middle class is indisputably being created. And that creates an insane amount of (the good kind of) inertia. Every time a Chinese person buys their first car, connects to the Internet the first time, etc, they add to the momentum of that middle class. I remain exceptionally optimistic about China's future because of that momentum.
posted by bpm140 at 12:36 AM on October 31, 2011

Michael Pettis on the Chinese economy
In this edition, Cardiff Garcia talks with Peking University finance professor Michael Pettis about the limits of China's economic model, why we shouldn't trust the country's growth numbers, and the state of its banking system. Pettis also shares what it's like to run a nightclub and manage an indie record label in Beijing.
posted by gen at 12:57 AM on October 31, 2011

Why not print money and distribute it in the form of consumption coupons that expire? That will devalue the currency, while boosting domestic consumption.
posted by delmoi at 1:16 AM on October 31, 2011

This guy says 'ballance' in a weird way.

Also, his solution is massive privatization. Hand over government companies to rich people, and that will boost 'income' He doesn't seem to have any concern over how that income is allocated. But we know that poor people spend more of their income on stuff then rich people, so boosting the wealth of poor people would be one way to do that easily.

China could focus on getting more 'stuff' to the rural poor. Like I said, give out spending coupons, they could work like EBT cards today, but for basic consumer items as well as food. Since China is a socialist country you won't have all the bitching about "Welfare" and all this other nonsense you get in the U.S.
posted by delmoi at 1:34 AM on October 31, 2011 [1 favorite]

Since China is a socialist country

Here I thought they were communist...
posted by infini at 1:47 AM on October 31, 2011

My favourite China skeptic is Hugh hendry, the eccentric hedge fund partner who has sadly now been banned from media appearances by his CEO. Particularly good is this video where he goes around a major Chinese city and poinst out all the skyscrapers with no tenants.
posted by Another Fine Product From The Nonsense Factory at 2:32 AM on October 31, 2011

His thoughts on the global economy in the next decade.


seems pretty orthodox ex-the "no social unrest in China" angle.
posted by JPD at 7:34 AM on October 31, 2011

This guy says 'ballance' in a weird way.

Not as weirdly as you spel it, delmoi. Could be part of the problem, actualy.
posted by IAmBroom at 9:32 AM on October 31, 2011

Was going back to check up on Victor Shih's figures for local debt, and found that he'd spoken at a conference on the state of the Chinese economy at USC's US-China Institute earlier this year (he sees no crisis in the short term because the debt, largely triangular, is owed to domestic/state institutions and government-backed, but long-term implications that are troubling). Whole thing looks very good from the few I've watched so far (people like Barry Naughton and Ho-fung Hung); I think what these speakers have that I feel is lacking whenever I read Pettis is that they have a much better grasp of political economy in China.
posted by Abiezer at 8:18 PM on October 31, 2011 [1 favorite]

Nice link, Abiezer. He references a book I'm unfamiliar with: Red Capitalism that sounds like it's worth a look.
posted by storybored at 9:42 PM on October 31, 2011

Interesting bit from a WSJ blog (if somewhat over-written) on those contests on economic policy in the upper echelons that have yet to be resolved.
posted by Abiezer at 4:30 AM on November 3, 2011

abeizer, forgive me if you've already talked about this somewhere on the blue, but do you agree with NPR that "Xi Jinping is in line for president and Li Keqiang on track for premier?"

What would the implications of that be?
posted by msalt at 11:41 PM on November 6, 2011

I've definitely heard that said, msalt. My understanding is that Xi Jinping is considered to be from the 'elite' faction, representing the coastal provinces and so likely to favour policies that serve their interests (continued pushing of the export trade etc.) Hu Jintao was seen as a 'populist', hence a few policies like abolishing the agricultural tax that served the poor hinterland more. But as I understand it, it's never so clear cut. Bit on this idea of the faction here. I have read that Li Keqiang was Hu's own favoured successor, so choosing Xi over him is seen as the pendulum swinging to the elites, with Li Keqiang getting the premiership no doubt a balancing act if that's what happens. This is a longer article by the same author as my previous link, looking at the factions and where the new elites are coming from; there's also this in the same (2009) issue of that journal with an overview of politics under Hu.
posted by Abiezer at 1:50 AM on November 7, 2011 [1 favorite]

Thanks!
posted by msalt at 10:03 PM on November 7, 2011