Michael Pettis
@michaelpettis.bsky.social
Senior Fellow at Carnegie China. For speaking engagements, please write to [email protected]
Michael Pettis is an American professor of finance at Guanghua School of Management at Peking University in Beijing and a nonresident senior fellow at the Carnegie Endowment for International Peace. He was founder and co-owner of punk-rock nightclub D22 in Beijing, which closed in January 2012. .. more
Economics
76%
Political science
11%
7/7
If you can't boost consumption growth, if the world limits the surge in your trade surplus, and if you refuse to lower your GDP growth target, simple arithmetic tells you how much investment growth you need to engineer, whether or not it makes economic sense.
If you can't boost consumption growth, if the world limits the surge in your trade surplus, and if you refuse to lower your GDP growth target, simple arithmetic tells you how much investment growth you need to engineer, whether or not it makes economic sense.
6/7
But Beijing is still facing the same constraints created by too-high GDP growth targets, so that as investment in the involuted areas declines, it just mean that we will eventually see investment shift to other sectors which will, in turn, suffer from excess capacity.
But Beijing is still facing the same constraints created by too-high GDP growth targets, so that as investment in the involuted areas declines, it just mean that we will eventually see investment shift to other sectors which will, in turn, suffer from excess capacity.
5/7
That's the main reason why investment poured into those areas in which Beijing had signaled it want to see production grow. It didn't seem to matter that these areas already suffered from excess capacity.
That's the main reason why investment poured into those areas in which Beijing had signaled it want to see production grow. It didn't seem to matter that these areas already suffered from excess capacity.
What’s New about Involution?
“Involution” is a new word for an old problem, and without a very different set of policies to rein it in, it is a problem that is likely to persist.
carnegieendowment.org
4/7
Because Beijing has still been unable to boost consumption growth, it could not allow investment growth to decline if it wanted to meet the 5% GDP growth target.
carnegieendowment.org/posts/2025/0...
Because Beijing has still been unable to boost consumption growth, it could not allow investment growth to decline if it wanted to meet the 5% GDP growth target.
carnegieendowment.org/posts/2025/0...
3/7
But here's the problem. The massive, post-2022 surge in investment in the industries that later suffered from involution was no accident. It was the engineered response to the collapse in property investment after 2021-22.
But here's the problem. The massive, post-2022 surge in investment in the industries that later suffered from involution was no accident. It was the engineered response to the collapse in property investment after 2021-22.
2/7
While some of the decline may reflect “a statistical correction of previously over-reported data”, as Goldman suggests, at least part of it shows that Beijing's battle against involution is working.
While some of the decline may reflect “a statistical correction of previously over-reported data”, as Goldman suggests, at least part of it shows that Beijing's battle against involution is working.
Fall in Chinese investment suggests Xi Jinping’s ‘anti-involution’ drive is biting
If data proves accurate then decline in flow of funds into fixed assets will make growth targets harder to hit
www.ft.com
1/7
Good FT article on declining investment growth in China: "A sharp decline in reported investment in China suggests President Xi Jinping’s campaign against excessive industrial competition may be having an impact on the Chinese economy."
www.ft.com/content/0087...
Good FT article on declining investment growth in China: "A sharp decline in reported investment in China suggests President Xi Jinping’s campaign against excessive industrial competition may be having an impact on the Chinese economy."
www.ft.com/content/0087...
14/14
That means China needs to reverse the explicit and implicit transfers that made manufacturing so competitive and domestic demand so weak, but if it does so, is it possible for Chinese manufacturing to remain so competitive? The historical precedents leave us very skeptical.
That means China needs to reverse the explicit and implicit transfers that made manufacturing so competitive and domestic demand so weak, but if it does so, is it possible for Chinese manufacturing to remain so competitive? The historical precedents leave us very skeptical.
13/14
Why is that so hard for that to happen? Because China's global manufacturing competitiveness is predicated on Chinese workers' receiving a 10-15 percentage-point lower share of what they produce than the workers of their trading partners.
Why is that so hard for that to happen? Because China's global manufacturing competitiveness is predicated on Chinese workers' receiving a 10-15 percentage-point lower share of what they produce than the workers of their trading partners.
12/14
The solution to China's persistent overinvestment and growing trade surpluses, then, is not for foreigners to make something the Chinese want but for Chinese households to retain in the form of wages and transfers a 10-15 percentage-point higher share of what they produce.
The solution to China's persistent overinvestment and growing trade surpluses, then, is not for foreigners to make something the Chinese want but for Chinese households to retain in the form of wages and transfers a 10-15 percentage-point higher share of what they produce.
11/14
Why is Chinese consumption so low as a share of production? Because most consumption comes from ordinary households, and the share ordinary households in China retain of what they produce is also the lowest in the world.
Why is Chinese consumption so low as a share of production? Because most consumption comes from ordinary households, and the share ordinary households in China retain of what they produce is also the lowest in the world.
10/14
That is why China runs growing net exports. It is not because it doesn't want anything from Europe or abroad. It is because consumption is just too low as a share of production (the lowest in the world) to absorb enough of what China produces domestically.
That is why China runs growing net exports. It is not because it doesn't want anything from Europe or abroad. It is because consumption is just too low as a share of production (the lowest in the world) to absorb enough of what China produces domestically.
9/14
That's the trouble: without rising consumption or a rising trade surplus, China must choose between an unpalatable rise in investment (with a worsening debt burden) and an even more unpalatable decline in production (with slower growth and rising unemployment).
That's the trouble: without rising consumption or a rising trade surplus, China must choose between an unpalatable rise in investment (with a worsening debt burden) and an even more unpalatable decline in production (with slower growth and rising unemployment).
8/14
That is why it is creating increasing problems for the economy, including a surge in bad debt that will ultimately derail the economy.
But unless it can get consumption or net exports to surge, it cannot allow investment to decline without also allowing production to decline.
That is why it is creating increasing problems for the economy, including a surge in bad debt that will ultimately derail the economy.
But unless it can get consumption or net exports to surge, it cannot allow investment to decline without also allowing production to decline.
7/14
China "invests" a great deal, more than any other country in the world, but since 2008-10, when the debt used to fund this investment began growing much faster than production, more and more of this investment has been of questionable economic value.
China "invests" a great deal, more than any other country in the world, but since 2008-10, when the debt used to fund this investment began growing much faster than production, more and more of this investment has been of questionable economic value.
6/14
Because production (i.e. GDP) minus consumption is equal to saving, this is just another way of saying that when a country saves more than it invests, it must run a trade surplus. It is not absorbing through consumption and investment as much as it is producing.
Because production (i.e. GDP) minus consumption is equal to saving, this is just another way of saying that when a country saves more than it invests, it must run a trade surplus. It is not absorbing through consumption and investment as much as it is producing.
5/14
The real reason Chinese don't import as much as they export has to do with their very distorted distribution of income. If a country produces domestically more than it invests or consumes domestically, it must run a trade surplus to resolve the excess domestic production.
The real reason Chinese don't import as much as they export has to do with their very distorted distribution of income. If a country produces domestically more than it invests or consumes domestically, it must run a trade surplus to resolve the excess domestic production.
4/14
the Chinese really couldn't find anything they wanted to import directly from Europe, as long as they imported from somewhere, that "somewhere" would in turn import from Europe.
A well-functioning global trading system, after all, must clear systemically, not bilaterally.
the Chinese really couldn't find anything they wanted to import directly from Europe, as long as they imported from somewhere, that "somewhere" would in turn import from Europe.
A well-functioning global trading system, after all, must clear systemically, not bilaterally.
3/14
That is not why China (or any other surplus country) doesn't import nearly as much as it exports. There are always foreign goods that people would like to import, especially from Europe, and in a well-managed global trading system, even in the extremely unlikely case that...
That is not why China (or any other surplus country) doesn't import nearly as much as it exports. There are always foreign goods that people would like to import, especially from Europe, and in a well-managed global trading system, even in the extremely unlikely case that...
2/14
However he makes a mistake when he says: "There is nothing that China wants to import, nothing it does not believe it can make better and cheaper, nothing for which it wants to rely on foreigners a single day longer than it has to."
However he makes a mistake when he says: "There is nothing that China wants to import, nothing it does not believe it can make better and cheaper, nothing for which it wants to rely on foreigners a single day longer than it has to."
China is making trade impossible
Europe has nothing to offer and difficult decisions to make
www.ft.com
1/14
This very good Robin Harding article points out that the purpose of trade should be the exchange of goods, and not the mercantilist accumulation of assets abroad.
www.ft.com/content/f294...
This very good Robin Harding article points out that the purpose of trade should be the exchange of goods, and not the mercantilist accumulation of assets abroad.
www.ft.com/content/f294...
China's rural small, medium-sized banks see steady expansion
english.news.cn
Xinhua: "As of the end of 2024, the total assets and liabilities of China's small and medium-sized banks in rural areas were RMB 57.91 trillion, up 6.06% year on year."
For comparison, total banking assets were RMB 444.57 trillion, up 6.5% year on year.
english.news.cn/20251125/23f...
For comparison, total banking assets were RMB 444.57 trillion, up 6.5% year on year.
english.news.cn/20251125/23f...
Top Sovereign Lending Official at Exim Bank Under Investigation
Zhu Ying, a key figure in African debt restructuring, is at the center of a corruption investigation
www.caixinglobal.com
Caixin: "Exim Bank is under growing financial strain. Its 2024 annual report showed assets of 6.4 trillion yuan, but revenue fell 55.8% year-on-year to 10.3 billion yuan, and net profit plunged 66.9% to 2.9 billion yuan," (i.e an ROA of 0.05%).
www.caixinglobal.com/2025-11-25/t...
www.caixinglobal.com/2025-11-25/t...