WRITE for ATol ADVERTISE MEDIA KIT GET ATol BY EMAIL ABOUT ATol CONTACT US
Asia Time Online - Daily News
             
Asia Times Chinese
AT Chinese




    China Business
     Jan 30, '14


Reforms in China: The impact on growth
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.

I got a lot of feedback from my January 5 blog entry because of my argument that the implementation of the reforms proposed in the Third Plenum all but guarantees that growth rates in China will slow down. For that reason I thought it might make sense for me to explain a little more carefully why I think this must happen, and why I think that we can almost judge how successfully the reforms are implemented by how quickly growth slows.



The first point to recognize is that when a country’s growth has been driven by wasteful investment, GDP growth will exceed real economic wealth creation, productivity will be overstated, and debt will rise faster than debt servicing capacity. Why? Because in China we record growth in terms of the cost of inputs, not in terms of the value of the outputs, and so if the cost of inputs exceeds the value of outputs, we will overstate the real value of economic activity.

Now of course this happens elsewhere too, but there is an automatic mechanism for writing down this excess. This mechanism is usually the recognition of bad debt. Companies that invest poorly go bankrupt, and the value of their loans is written off. This writing off of bad loans shows up as a correction to the overstatement of growth and productivity. 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 2014 Michael Pettis)





 

 

 
 



All material on this website is copyright and may not be republished in any form without written permission.
© Copyright 1999 - 2013 Asia Times Online (Holdings), Ltd.
Head Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East, Central, Hong Kong
Thailand Bureau: 11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110