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Avoiding the Fall: China's Economic Restructuring [Kindle Edition]

Michael Pettis

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Book Description

The days of rapid economic growth in China are over. Mounting debt and rising internal distortions mean that rebalancing is inevitable. Beijing has no choice but to take significant steps to restructure its economy. The only question is how to proceed.

Michael Pettis debunks the lingering bullish expectations for China's economic rise and details Beijing's options. The urgent task of shifting toward greater domestic consumption will come with political costs, but Beijing must increase household income and reduce its reliance on investment to avoid a fall.

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"A fascinating and provocative read for anyone interested in China's economy." --J.C. de Swaan, Lecturer in Economics, Princeton University, and Principal, Cornwall Capital "Insightful and compellingly argued, this well-timed book is a valuable key to understanding why the engine that propelled China's thirty-year ascent is now threatened with power failure." --Guy de Jonquieres, Senior Fellow, European Centre for International Political Economy "Can China make it past the middle-income trap? Having lived and taught in Beijing for more than a decade, Pettis is uniquely qualified to address this and many other key issues. Don't miss this book." --Arminio Fraga Neto, Former President, Central Bank of Brazil

About the Author

Michael Pettis is a senior associate in the Carnegie Asia Program, based in Beijing. An expert on China's economy, Pettis is professor of finance at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean's Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001).

Product details

  • Format: Kindle Edition
  • File Size: 887 KB
  • Print Length: 172 pages
  • Publisher: Carnegie Endowment for International Peace (24 Sept. 2013)
  • Sold by: Amazon Media EU S.à r.l.
  • Language: English
  • ASIN: B00EOAT5A8
  • Text-to-Speech: Enabled
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  • Word Wise: Not Enabled
  • Amazon Bestsellers Rank: #150,053 Paid in Kindle Store (See Top 100 Paid in Kindle Store)
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Most Helpful Customer Reviews on (beta) 4.5 out of 5 stars  19 reviews
15 of 15 people found the following review helpful
5.0 out of 5 stars Pettis Remains Ahead of the Pack on China 25 Jan. 2014
By Eric - Published on
Format:Kindle Edition|Verified Purchase
This book as intellectually rigorous as iconoclastic. And it may be on the most important topic of world economics in the next two decades.

After events disprove the conventional wisdom and prove Pettis correct, then the conventional wisdom will assimilate Pettis' conclusions, in a formulaic manner, but without his insight.

In some ways, the basic idea is actually quite simple: China's growth model is based on artificially inflating domestic savings rates to support extremely high levels of investment. While this works well for a while, eventually, it must break down.

Although the extra investment helps China increase production very rapidly, the high rate of savings means that the new production exceeds the domestic demand for new consumption goods.

In the past, that has meant that the extra goods would be offloaded to China's trading partners. Now that demand channel is exhausted. The rest of the world can no longer absorb China's surplus goods -- and it won't.

For a while, China can keep increasing domestic investment, but without the final demand to justify more production capacity, the new investment becomes more-and-more wasteful and less-and-less profitable. This means that sooner or later, the debt used to finance this investment cannot be repaid.

So if China cannot change its current economic path, eventually there must be a a financial crisis. It's not an "if" question anymore, it's a "when" and "how serious" issue.

If China adjust rapidly and rebalances, growth might be maintained a lower, but still relatively high rates. If not, then growth rates must fall as low as 3% annually.

However, there are strong vested interests that will resist change in China and the results could be "suboptimal."

How this plays out could well be the most important economic development of the next two decades in my opinion. Pettis' book is the best place to gain insight into the dilemmas and consequences facing China and the World.
29 of 33 people found the following review helpful
5.0 out of 5 stars Pettis takes Econ to a different level. Well-constructed philosophical underpinnings. 27 Sept. 2013
By Lemas Mitchell - Published on
Format:Kindle Edition
This book seems to be an expansion of his discussion of imbalances in the Chinese economy in his next to last book (referenced in this review).

Of the book:

1. It's 172 pages and can be read through in 2-3 hours

2. The references are at the end of each chapter and that makes for easy location.

3. Most of the references are 2012 or later.

4. The prose is approachable and unpretentious.

Philosophical underpinnings:

1. A lot of the commentary on the Chinese growth story has been more "philosophical-intellectual." (The former achieves consistency by convention and agreement. The latter starts with some numbers or a model and then follows it to its logical conclusion.) Economists heretofore have been also enamored of the China growth story without knowing any history, and have not checked to see if these things have happened before. Where does this book offers something different? It is in that it is that takes more of an"engineering-like" approach.

2. It deals with historical examples in order to: i) build; ii) test; iii) confirm the model. The tightly reasoned model comes in two parts. a.This is a story of accounting identities and it picks up where his last book (The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy) left off; b. There is historical precedent for what has happened before.

3. Another area in which this is immediately different is that the author treats the motivations of the Chinese leadership as a black-box. (How often do you read some publication where it says that such and such is claimed by so and so "familiar with the thinking of the Chinese government"?) He assumes (quite correctly) that there are no more than 9 people who know what the standing Politburo Committee says and none of those 9 are talking. Those who know don't talk and those who talk don't know.

4. Financial terms ("discount rate"/ "market uncertainty") are introduced as needed. In actuality, this is an extension on the first point. Pettis has made a living as a trader, and financial traders often have "boots on the ground" and make use of tools in their line of work that don't require as much philosophy, but rather having access to good, hard data-- and knowing how that data relates to every day transactions.

It would have been nice to have some worked numerical examples. We all have in the back of our mind that Y= C+I+G+(X-M), but if he could have spelled it out a little more clearly for those of us who don't know it or those of us who don't have such great facility with it, that would have been nice.

What do we learn? (I'll only include things that are different to what was presented in The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy since there is significant overlap.)

1. There are various mechanism available to suppress consumption. Wages can grow slower than productivity. An exchange rate can be artificially low, and that acts as a consumption tax of sorts. There can be direct taxes on many things (computers). Interest rates can be kept lower than inflation (BIG TAX).

2. Pettis clears up the distinction between the three types of investment (value, arbitrage, speculative). A properly functioning market requires all three types,, and a surfeit of one over the other can have certain consequences. The Chinese market does happen to have more of one type than the other for reasons idiosyncratic to China (=a country with a very weak and inconsistent legal system).

3. Corruption is also an incentive to favor speculative investment over value investment. Since investment opportunities are made to maximize corruption opportunities then people will logically speculate.

Verdict: This book is enthusiastically worth the price ($9.99 Kindle) and the time (<3 hours of reading).
13 of 15 people found the following review helpful
4.0 out of 5 stars A book that is definitely worth reading - even if it's wrong on the details 8 Jan. 2014
By sien - Published on
Format:Paperback|Verified Purchase
Avoiding the Fall (2013) by Michael Pettis is a book that looks at the imbalances in China’s growth. Pettis lives in Beijing and is a professor of finance there. He was a very successful trader prior to this.
Pettis thinks that China is massively over investing in infrastructure and that this investment has become unproductive. He thinks that China’s lack of consumer consumption is a profound problem and that within the next decade China will crash as many other countries have as their growth is dependent on exports and investment.
In the book Pettis points out that Chinese consumption is extremely low, at around 35% of GDP compared to successful developed countries such as the US where it is 60+% of GDP. He points to the examples of Brazil in the 1980s, Japan in the 1990s, the US in the early 1930s and a hypothesized example of Germany in the late 1930s as examples of a failure of this kind of development. He then spends much of the pondering how China can possibly increase consumption rapidly enough to handle a fall in GDP growth when investment and export growth simply cannot support the growth of the economy any more.
The argument that Japan, Brazil, the US & Germany have crashes in common is also worth looking at. Brazil does not fit into the group. When Brazil crashed it was not at a world leading level of wealth per capita. The question for China is when will growth slow down? It could be as early as around 2015 when Chinese wage rises mean that the US and other countries become competitive for manufacturing or it could be in 2030 by which time China will comfortably be the world’s largest economy.
Pettis has made an interesting bet with The Economist newspaper that China’s GDP will not surpass America’s in 2018. The Economist has accepted that bet and made a counter proposal against a belief of Pettis that China’s growth will not surpass 3% in the 2010s.
The book is somewhat reminiscent of the arguments of Steve Keen, the Australian economist who believed that there was massive debt overhang in the early 2000s that would lead to a financial calamity. Keen was right overall but wildly wrong on detail, he made a bet that Australian houses would plummet in value which they promptly did not. Nonetheless Keen was right overall that global debt and housing price rises would lead to serious trouble. It’s hard not believe that Pettis has a similar point even if he is wrong about the detail of why Chinese growth will, in the next decade, slow dramatically at some point.
The book is definitely worth reading for anyone interested in looking at why China may well crash in the next few years. It may well be wrong, but it is definitely not crazy and definitely is fascinating.
7 of 7 people found the following review helpful
5.0 out of 5 stars dose of clear thinking 23 Oct. 2013
By Yangsian - Published on
Format:Kindle Edition|Verified Purchase
This is a brilliant book that makes many important contributions, among them a resolution of the question around why Chinese inflation is relatively low when the money supply has been growing so quickly. I particularly like the lack of cant that characterizes Pettis' work generally. he is not concerned with socialist-capitalist, authoritarian-democratic or any of the other axes of categorization; he is concerned with economic dynamics that apply to all social and economic systems whatever they say about themselves.
8 of 9 people found the following review helpful
3.0 out of 5 stars Interesting Thesis but Very Repetative and Begs Many More Questions than it Answers 30 April 2014
By Andrew Friedle - Published on
Format:Kindle Edition|Verified Purchase
The main thesis of the book is that the Chinese Growth Model based on investment cannot be sustained as a result of misallocation of resources. Simply put: China is misallocating its investment resources effectively destroying wealth in the long run. In the short run the GDP Growth is a 'miracle' but this is simply a mirage since in the long run growth must slow as these misallocated investments are realized.

The thesis is well articulated and plainly put, but I am disappointed by the books lack of data and details. The author spends most of the book repeating the same point: China must rebalance one way or another. Every chapter essentially is the same topic stated slightly differently. The chapters rarely go into statistical data beyond 'back of the hand calculations' and many of these beg questions.

For example, the author at one point states environmental degradation is a transfer of wealth from households to state owned business and later states that unless investment can be directed towards 'productive uses' that investment cannot continue. To me, this begs the question of: 'Why can't Beijing invest in environmental regulation effectively transferring wealth from the state to households while maintaining their current growth model?' In another part of the book the author states that investment experiences high depreciation rates as a result of poor construction. This begs the question: 'Why can't Beijing invest in retrofitting buildings through building codes as a way to maintain their current investment model?'.

Another example is the authors argument that investment is often under reported. However, to me this begs the question: 'Why is consumption not underreported?' As someone who lives in China, the author has probably been to night markets and street vendors which are most likely not part of the formal Economy. The author even admits that starting a business in China is a time consuming and a difficult process. This implies that there must be a large Shadow or Informal Economy in China. The author ignores this completely.

In all these cases the author fails to address these begging questions.

Another issue is one that has been leveled at this author a few times: his lack of any, even simplistic accounting equations, to inform his audience. Many times in the book he says 'as we all know...' or 'obviously it is the case that...' but then fails to provide even a simplistic diagram or numerical example to persuade his audience that 'Yes, of course we all know that what you're saying is true!'

The above brings me to the final point: his writing is a mix of academic and popular economics. His writing itself is very accessible, but when he brings up subject specific words and concepts like current account deficit or surplus he fails to adequately explain these terms or why they matter. The author assumes the reader is already familiar with these concepts. The prose itself is well done, but the technicalities of his arguments could use further explanation and elaboration specifically in the form of numerical examples.

In the end, the author's thesis is interesting and well put. However, the book itself is extremely repetitive, light on data, and raises more questions than it answers. Overall, I would recommend this book to serve as an introduction to more heavy reading on the topic. Buy this book as your first when starting down the rabbit hole that is China's Economic Issues, but do not let it be your only book.
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