Some, however, like Beijing University economist, Michael Pettis, are more cautious, pointing out in a column that while current consensus for China’s long-term growth, remains around 6-7%. “I believe, however, that without a massive and fairly unlikely transfer of wealth from the state sector to the household sector, the average Chinese GDP growth rate under Xi Jinping cannot exceed 3-4%.”
This view is not, however, predicated on a poor view of government policy. Rather, he says, “once a country’s balance sheet reaches a certain critical point, any analysis is fundamentally mistaken if it simply acknowledges the existence of a great deal of debt, or sees a debt buildup as unlikely, or as the consequence of bad policy.”
For Pettis, there is a big difference between merely acknowledging that China has a lot of debt and understanding how debt and debt creation are embedded within the financial system.
He is of the view that an economy is a dynamic system made up of “interlocking balance sheets”
“Debt was already a problem in the Chinese growth model more than ten years ago…Those analysts who do not understand why this is the case probably do not understand why the balance sheet will continue to be a heavy constraint on Chinese growth and will underestimate the difficulty of the challenge facing Xi Jinping and his administration, which means among other things that they will be too quick to criticize Beijing for failed policies when growth drops below their projections.”
There is no doubt that debt will have a role to play in China’s rebalancing project, but perhaps even more important than that will be stakeholders’ ability to tolerate short term pain and, particularly missed expectations – which makes navigating such a shift even harder.
