Michael Pettis is Senior Associate at the Carnegie Endowment for international Peace and a Professor for Finance at Peking University’s Guanghua School of Management
China on Saturday said it would increase the flexibility of his exchange rate regime. An apparent concession to US pressure to let the renminbi rise? What is your assessment of this?
This is an almost impossibly difficult situation for all sides. Beijing wants to introduce flexibility to their currency regime and understand the urgent need to do so, but they are in a very difficult position and cannot move too quickly without causing serious damage to their export sector. Unfortunately domestic pressures in the US mean that Washington need to resolve the US imbalances much more quickly than China can accommodate, and the impact of the European crisis is forcing an even more rapid rebalancing on China.
What is your take on the current situation of the China’s economy?
China can grow only as long as Beijing forces through further increases in investment, but these increases in investment are likely to lead to a long-term slow-down as households are forced to bear the burden of rising bank and government debt. I believe Chinese growth will slow over the next five years much more sharply than most of us are expecting.
How did global imbalances contribute to the crisis ? Can we avoid a repeat in the future ?
Large trade imbalances always come with monetary and balance sheet imbalances, and we are now seeing the economic effect of the need to unwind those imbalances. Deficit countries have run up dangerously high debt levels and will be forced to reduce consumption as part of the deleveraging process. Surplus countries have locked in manufacturing growth by indirectly constraining consumption growth, and they will not be able to reverse these constraints without causing deep pain in the manufacturing and investment sectors.
Thank you very much.
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 taught from 1992 to 2001 at the Columbia University’s Graduate School of Business.