Asia Times Online :: After the party runs dry

China Business

Sep 26, '13

After the party runs dry
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.

Since the beginning of the global crisis in 2007-08 I have argued that the crisis was a consequence primarily of global trade imbalances generated by structural features that led to significant saving imbalances in China, the US, and within Europe. I describe

this model in more detail in my recent book, The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy (Princeton University Press).

In that sense the current crisis shares a lot of characteristics with nearly every other global crisis of the past 200 years, as I point out in my book, and is likely to be resolved in similar ways: with a series of sovereign defaults or debt restructurings including, but not limited to, a number of European countries.

None of the “globalization” cycles of the last 200 years has ended without widespread sovereign defaults except the one that ended in the First World War, and in that case the war caused soaring commodity prices and sharp constraints in Europe’s manufacturing exports, both of which were a tremendous help to developing countries.

This probably why this was the only "globalization" cycle that did not end in massive sovereign defaults. ... 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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