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    China Business
     Aug 23, '13


China's 'urbanization' is a growth fallacy
By Michael Pettis

Beijing-based economist Michael Pettis has carved out through his "China Financial Markets" blog a distinct position with his commentaries on the Chinese economy, notably with his consideration of the difficulties it faces with its necessary rebalancing towards a more consumption-based model. Asia Times Online here draws the attention of Pettis' latest insightful analysis to a wider public.

The latest default bull argument supporting higher levels of growth


in China than I believe possible is the urbanization argument. Beijing is planning another major urbanization push, and according to this argument China can resolve the problem of wasted investment by investing in the urbanization process, that is it can engage in a massive investment program related to the need to build infrastructure for all the newly urbanized.

Like so many of the earlier bull arguments, however, this new belief that urbanization is the answer to China’s growth slowdown is based on at least one fallacy and probably more.

The first and obvious reason is that urbanization is not an act of God, and therefore indifferent to earthly conditions. Urbanization itself responds to growth. Countries do not grow because they urbanize, in other words, they urbanize because they are growing and there are more good, productive jobs in the cities than in the countryside. In that sense urbanization is not a growth machine. It is simply a pro-cyclical process that accommodates growth when growth is rising and reduces it when it falls.

And pro-cyclicality is a bad thing ... more.

Michael Pettis is a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has taught, from 2002 to 2004, at Tsinghua University's School of Economics and Management and, from 1992 to 2001, at Columbia University's Graduate School of Business. He is also Chief Strategist at Guosen Securities (HK), a Shenzhen-based investment bank.

(Reprinted with permission. For Michael Pettis' blog, see here.

(Copyright 2013 Michael Pettis)








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