Avoiding the Fall

Avoiding the Fall (2013) by Michael Pettis is a book that looks at the imbalances in China’s growth. Pettis lives in Beijing and is a professor of finance there. He was a very successful trader prior to this.

Pettis thinks that China is massively over investing in infrastructure and that this investment has become unproductive. He thinks that China’s lack of consumer consumption is a profound problem and that within the next decade China will crash as many other countries have as their growth is dependent on exports and investment.

In the book Pettis points out that Chinese consumption is extremely low, at around 35% of GDP compared to successful developed countries such as the US where it is 60+% of GDP. He points to the examples of Brazil in the 1980s, Japan in the 1990s, the US in the early 1930s and a hypothesized example of Germany in the late 1930s as examples of a failure of this kind of development. He then spends much of the pondering how China can possibly increase consumption rapidly enough to handle a fall in GDP growth when investment and export growth simply cannot support the growth of the economy any more.

The argument that Japan, Brazil, the US & Germany have crashes in common is also worth looking at. Brazil does not fit into the group. When Brazil crashed it was not at a world leading level of wealth per capita. The question for China is when will growth slow down? It could be as early as around 2015 when Chinese wage rises mean that the US and other countries become competitive for manufacturing or it could be in 2030 by which time China will comfortably be the world’s largest economy.

Pettis has made an interesting bet with The Economist newspaper that China’s GDP will not surpass America’s in 2018. The Economist has accepted that bet and made a counter proposal against a belief of Pettis that China’s growth will not surpass 3% in the 2010s.

The book is somewhat reminiscent of the arguments of Steve Keen, the Australian economist who believed that there was massive debt overhang in the early 2000s that would lead to a financial calamity. Keen was right overall but wildly wrong on detail, he made a bet that Australian houses would plummet in value which they promptly did not. Nonetheless Keen was right overall that global debt and housing price rises would lead to serious trouble. It’s hard not believe that Pettis has a similar point even if he is wrong about the detail of why Chinese growth will, in the next decade, slow dramatically at some point.

The book is definitely worth reading for anyone interested in looking at why China may well crash in the next few years. It may well be wrong, but it is definitely not crazy and definitely is fascinating. 

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