Michael Pettis

China’s Consumption Push Repeats Old Production‑centric, Flawed Strategy

“China’s long-term strategy to improve consumption has turned out to not be a new strategy at all; instead, it is the same strategy China has always relied on—one that focuses on increasing production with an expectation that household incomes will eventually rise as production improves in the long term. It manages symptoms while refusing to let go of the old economic and political structures, leaving the underlying problems untouched.” Francesca Ghiretti makes a very important point about something that is not sufficiently recognized, especially in China. Most economists now understand that China’s economy is driven by way too much bad investment, too little consumption, and an excessive reliance on surging debt and massive trade surpluses to keep it going, but if they recognize that these are structural problems, they do not say so in public, perhaps because saying so implies policy failures during the past decade. Instead they insist on proposing short-term technical fixes to these problems, even though several years of short-term technical fixes have seen every problem only get worse. But what else can they do? Structural solutions will inevitable lead to politically unacceptable slowdowns in GDP growth, a reversal in manufacturing dominance, and income redistribution that will especially hurt local governments. So, as Ghiretti notes, Beijing keeps doubling down on the very policies that created the imbalances. And all the while, debt must continue to surge. Ultimately it is debt capacity that sets the limits.