Avoiding The Fall reads like the story of the Emperor’s New Clothes. China’s economy has had thirty years of lightning fast growth and looks like it has room for another thirty years, but the author, economist Michael Pettis, is shouting that China’s economy isn’t healthy at all. His approach is well reasoned and approachable for non experts such as myself which makes his opinion incredibly alluring, but this is also it’s greatest downfall. Pettis writes throughout the story with an air of certainty – his argument isn’t wrong and no one can possibly argue against it – and so ignores counter points and alternative arguments as fundamentally off base. His well crafted web of facts and arguments could be fragile but he doesn’t seem overly concerned about it. This isn’t an argument against his book per se, but it does make he hesitant to believe it.
The book’s argument is simple: China has a raft of policies depressing its consumption rate and elevating the investment rate; this has caused poor investments to an extent which is no longer manageable; therefore the Chinese economy will be forced into a correction most likely highlighted by an extended period of stagnant growth.
China’s growth is investment driven rather than consumption driven. The facts are striking. The household consumption rate is a way to measure local expenditure in an economy relative to investment and government spending. Values typically are high: As a percentage of GDP the US is 68.0%, the Germany is 55.9%, Japan is 61.1%, India is 60.4%, etc. In China it is 34.1% of GDP, an unheard of value in large economies. Through a raft of policies the government is forcing them to saving their money in banks at an artificially high rate. The gross national savings rate is relatively low throughout the world, the US is at 17%, Germany is 26%, Japan is 22%, India is 30%. China is again the opposite at 51%. The banks are spending this money on investments, and have been doing so for the last thirty years, however not all investments are worth the cost. Three decades of fast growth has built a huge reservoir of debt that can no longer be paid down or rolled over. When the debt becomes unmanageable something has to change.
A China which can no longer rely on ever greater investment as the primary engine of growth will look very different. Alternative growth strategies are primarily consumption based, which is fine, but the transition has proven difficult for other countries in this situation. Brazil and Japan were both described as economic miracles with expectations sky high, but in each case they sputtered out. Brazil in the 1970’s and Japan in the 1990’s showed that when investments stopped performing and debt levels got beyond control the result was a crash in investment and a slow adjustment of consumption to make up for it. This led to ten plus years of flat growth which neither country has truly recovered from.
This transition is unavoidable according to Pettis, but in the conclusion he attempts to show alternative paths forward which can ease the adjustment. In great detail he describes six methods China is using or considering using, however in the final analysis Pettis shows that all of them are either impractical, unlikely to have enough of an effect, or lack the political or social will to be implemented. Pettis ironically has quite an optimistic tone about the whole thing, but I suspect this could be due to his living and working in China and needing to keep the CCP happy.
Avoiding The Fall is one of the most interesting books I’ve ready about current events in China and while only time will tell if he is right, Pettis has certainly laid out a convincing argument that screams to be paid attention to.