The Evolution of the Chinese Growth Model

The recent turmoil in China's property markets is not a cause of China's economic slowdown but rather a symptom of the underlying imbalances in the Chinese economy that must eventually lead either to dramatic transformation of the country's growth model or to a very sharp slowdown. It also illustrates, however, just how difficult it is for Beijing to implement the reforms it has been discussing for nearly a decade.
About the speakers
Michael Pettis is a finance professor at the Guanghua School of Peking University and Senior Fellow at the Carnegie-Tsinghua Center. Before moving to China in 2002 Pettis spent fifteen years on Wall Street running fixed-income trading and capital markets desks at JP Morgan, First Boston and Bear Stearns, where he advised Latin American, Asian and Eastern European governments on debt and balance sheet strategies. During the last nine of these years he also taught finance and economic history at Columbia University. He has published over 200 articles in various leading periodicals along with six books, the most recent of which, Trade Wars are Class Wars (Yale University Press 2020), was awarded the Lionel Gelber Prize. He received an MBA in Finance and an MIA in Development Economics from Columbia University.
Glenda Korporaal (Chair) a columnist with The Australian newspaper with a long time interest in China.
She has been covering business, finance, economics and world events as a journalist in Australia and around the world for more than thirty years.
She is a former China correspondent for the Australian newspaper (2018 and 2019) and former editor of The Australian’s business magazine, the deal. She covered the 2008 Olympics in Beijing and attended the 2010 World Expo in Shanghai.
She has worked as a journalist in Sydney, Canberra, Washington, New York, London, Hong Kong and Singapore and has interviewed many senior business executives in Australia and around the world.
Her career has included stints as London, Washington and New York correspondent for The Australian Financial Review (AFR).

[@jtlon1]

Fanstastic insights. Thank you to Prof. Pettis and the moderator.

[@kristianwedberg4640]

Really useful, thank you.

[@tuzisyy]

Amazing analysis.

[@deebil8099]

I don't know, I think the real estate will continue to rise in price until the cheapest 1 bedroom apartment in China cost $20 million and the entire Chinese population is living on the streets. But GDP will still be up by 6% year on year. The only thing that matters is projecting high GDP numbers to the rest of the world.

[@georgeokello8620]

I highly doubt that. Typically wars, successful revolts or large scale deaths from epidemics put an end those types of mythical infinite growth model economies where the overvalued assets are reduced to zero. The capital can now get reallocated without the financial hoarding dynamics from large investors that are engaging in non discretionary capital allocation that are concerned with inflating asset valuations at the expense of healthy capital formation.

[@deebil8099]

@@georgeokello8620 First of all this isn't capital. The Chinese real estate market is valued at over 50 trillion USD. This is all debt. All these banks will have to realize these loses that they have on their balance sheets as assets. This is exactly what happened to Japan in the 1990s. There was no war, revolt or epidemic. Their economy stagnated for like 30 years. That would be the best case scenario for China.

[@georgeokello8620]

@@deebil8099 You are aware debt is package as a form of capital that is traded amongst global investors ie Mortgage backed securities, ABS, CLO's and corporate debt markets. There are premiums charged on securities that are derived from the debt used for the some purpose of fulfilling a mathematical growth obligation on some institutions balance sheet. This is just how capital markets work in general.

[@deebil8099]

@@georgeokello8620 Yes, I am aware of how mortgage backed securities caused the 2008 financial crisis. This is not how the Chinese real estate market works. Some of the large Chinese real estate developers sold bonds internationally, but those were relatively small and went to shit. The biggest problem for the Chinese banks is that they use the land and properties as collateral on their balance sheets to loan out more money. This collateral isn't worth what they write it down as. They have worthless empty apartments on their balance sheets. This is a giant ponzi scheme

[@deebil8099]

@@georgeokello8620 30% of China's GDP is real estate. How would you just reallocate that? There are thousands of downstream businesses like the steal industry and construction that rely on that capital. Even if you can reallocate 30% of the economy, where would it go? Does China have some new magical industry it can easily move all of the workers in this sector to? Maybe steal workers will start programing tomorrow. The industries outside of real estate are laying off workers. Also, the capital isn't coming from large investors. It's middle class people spending their savings to buy a tiny overpriced apartment that will never be finished.

[@kreek22]

The birth rate issue is interesting, even if it's a slow roll in its effects. I recently took a look at it from a cross-national perspective. The general rule in the last few decades is decline everywhere. However, there are a few exceptions where the birth rate has held more or less steady. In Israel, the most impressive exception, the birth rate has remained around 3 for the last 40 years. In Vietnam it has declined very slightly in the last 20 years from 2.2 to 2.0. Japan has been stable at around 1.35 for 25 years. Algeria looks like another exception, but it is not once its civil war is accounted for. There are some Western countries like Germany, the US, the UK that look like exceptions, but their birth rates stabilized only due to importation of high fertility immigrants. The Russian birth rate increased after the economically catastrophic 90s, but not to the levels seen in the 80s, only to 1.5. Before the pandemic China's birth rate ran at about 1.5. It's been lower the last 2 years, but that may be transient. If it could stabilize at 1.5, its decline would be modest--from 1.4 billion today to ~850 million in 2100. This is a 40% decline, but the working age population would decline 50-55%. However, if it fails to stabilize, it may follow South Korea and Taiwan into the disaster demography. They only produce 0.8 and 1 children per woman. That's a doom cycle. If they fell to a 1 birth rate by 2040 and stayed there, China would collapse to ~500 million by 2100, with a workforce drop of 75%. But, who has children in China? Farmers and ethnic/religious minorities. Who has few or no children? The students of Pettis, ultra-elite grads of China's top two universities. What does this mean? China is not so much facing a near term crisis of depopulation (it had 400 million in 1900 and no one in or out of China thought it underpopulated). Instead, like the rest of the world it faces a crisis of dysgenic breeding. The most capable people are having the fewest children, and since everything is heritable...the future of China looks dumber and sicklier than its present. Of course, the fact that everything is heritable puts to the lie to "institutionalism" as an all purpose explanation for economic performance. The quality of the people comes first, must pre-date functional institutions. High IQ nations invented the best institutions. Low IQ nations cannot even replicate these inventions. High quality institutions are invented by and used capably as tools by high IQ societies. The leaders in institutional innovation also have deep historical experience and cultural adaptations to serve as foundations for these processes. The Federalist authors refer repeatedly to political lessons from ancient Greece, more than 2,000 years before their time. The Western Hemisphere had no such depths to draw upon--neither did black Africa, SE Asia, Australia--until the Europeans arrived and attempted to confer the benefit of their tradition. But, 500 years later vast civilizational gaps remain. Only those people civilized before the age of discovery have, in some cases, achieved progress today on par with Europeans. The barbarians of 1500 today constitute the Third World. They have not the native talent to even copy the institutions of the West. So people like Pettis encourage these talentless lands to invade the West.

[@georgeokello8620]

The fact that you are stating that low IQ portions of a population cannot form institutions within their own country is hilarious and possibly ignorant in terms of your own knowledge of cultural dynamics of certain groups correlating with institutional and economic success. Even just from census immigration trends going as far back as 60 years in the USA, the so called farmers and low wage immigrants had much greater propensity of acquiring/developing wealth in a generation and even their children as first generation immigrants became much more well off than the vast majority of citizens in the USA. Historically these groups have been the Jews, Chinese, Indians, Nigerian Immigrants whom even at the time by early 1960s-1980s had extremely low income and even low amount of ability to pass assets that derived from past inventions. After all these groups outperform the native groups at an education and financial level not just even in the USA but even in the developed countries where their human capital valuation in a different geography from a group level (relatives or children) appreciated despite coming from non high IQ performing regions. Even British and Nordic immigrants coming to USA outperformed those very same citizens even given that the IQ tests administered required the test taker to even understand English and the immigrants generated income rapidly in technical fields involving math and science despite having half to 60% the level of literacy. USA takes advantage of importing capital of talented ppl from outside the USA whether they are foreign caucasians to any other race and it has been this way even before the birth of USA. Even your institution argument is horrible at best. At least one fundamental component of effective commerce are legitimizing contracts as a way to securely transact via property rights that comes from governments. Without property rights which originally come from an institution level, there is no long term investment in new projects that solve scientific and social problems. After all, USA just from capital flows and net asset position standpoint has gotten capital flows(foreigners own US assets aka net creditor) since WW1 era as it was an institution you can guarantee that you can invest in their securities market without worrying about losing your investment to government overthrow and having your bond security go down to zero when doing the capital allocation. You are just delusional fear mongering about "invasion of the west" from a country that has the most powerful nuclear weapons and naval systems in the planet.

[@kreek22]

@@georgeokello8620 Nonsense and nothing but.

[@georgeokello8620]

@@kreek22 sure … if that’s all you got 😂😂

[@bobalot2]

​@@kreek22LOL, great response.

[@eversor431]

This is one area where the answer is absolutely not "It depends." Anyone with rudimentary knowledge of 20th century history should know this, but ideology is a powerful drug.

[@kreek22]

I decree that thou shalt suffer the secretest curse ever composed of proleptic consciousness: anosognosia.

[@hpaul2864]

Money for Building (Construction) is still better than money for Wars (Destruction)

[@kreek22]

As Herr Professor indicated, "it depends."

[@georgeokello8620]

Sure you can tell that to some of the South American nations that have been on the hook for USA debt for over investing in those infrastructures and even got hit with hyperinflation.

[@sanmcnellis94]

Hogwash.

[@wesleyyoung8159]

Clown

[@weewillywonga]

Why so salty

[@deebil8099]

@@weewillywonga He is probably Chinese. They get but hurt easy when you say anything that might not paint China as #1

[@georgeokello8620]

@@weewillywonga He yearns for attention like an instagram model.