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Michael Pettis @michaelpettis.bsky.social · 5d

US manufacturers who export are outperforming US manufacturers who don't. That's not much of a surprise. It's why many countries intervene in their currencies, so as to strengthen manufacturing exports.

www.ft.com/content/a8a7...

Multinationals race ahead as dollar slump divides US stock market

Domestically focused companies lag behind as currency suffers worst year since early 2000s

www.ft.com

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Michael Pettis @michaelpettis.bsky.social · 5d

Caixin: "The industry is looking to shift to a buyer-funded model, under which investors, rather than issuers, would pay. This comes as investors are railing against flattering reports and inflated credit ratings."

www.caixinglobal.com/2025-10-01/b...

Beijing Warns S&P Global’s China Unit Amid Push to Curb Inflated Credit Ratings

The agency must strengthen quality control in its rating operations and improve the standardization of information disclosure, the regulator says

www.caixinglobal.com

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Michael Pettis @michaelpettis.bsky.social · 6d

2/2
I respond to the article on Twitter, but for formatting reasons I cannot repost it on Bluesky. For those interested, you can find it here: x.com/michaelxpett...

x.com

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Michael Pettis @michaelpettis.bsky.social · 6d

1/2
Very interesting article by Martin Sandu on whether trade imbalances are good for the global economy or bad.
www.ft.com/content/a2f3...

How I learnt to stop worrying about China’s surplus

Lessons from economic history point to the benign effects of ‘overcapacity’

www.ft.com

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Michael Pettis @michaelpettis.bsky.social · 6d

3/3
Among other things, he argues that "deglobalization" is not the alternative to our globalized system. There are different kinds of globalization, with very different impacts on the global economy and on those of each country, and the real question is what kind we will choose.

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Michael Pettis @michaelpettis.bsky.social · 6d

2/3
laissez-faire liberalism, which prevailed under the influence of the Manchester School and became government policy under Chancellor of the Exchequer and later Prime Minister William Gladstone, was coming to an end, challenged by arguments for economic interventionism."

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Michael Pettis @michaelpettis.bsky.social · 6d

1/3
Very interesting essay by Graeme Thompson that places the intellectual underpinnings of the current global trade regime in an historical perspective. By the end of the 19th Century, Thompson writes, "the long-standing hegemony of...
@ga_thomps
engelsbergideas.com/essays/the-e...

The end of Pax Britannica

A mercantilist, multipolar geopolitical system appears to be emerging from within the liberal world order, destined to replace it. The experience of Britain's imperial past suggests that this transfor...

engelsbergideas.com

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Michael Pettis @michaelpettis.bsky.social · 6d

9/9
Some argue that this time it will work because, by eliminating the EV industry in the rest of the world, Chinese manufacturers will eventually be the sole global producers, but this, of course, assumes the rest of the world allows it to happen, which for now seems unlikely.

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Michael Pettis @michaelpettis.bsky.social · 6d

8/9
The ostensible reason for continuing to support the EV industry is that eventually there will be a shakeout and the "winners" will reap the benefits. But this, of course, has always been the standard justification for overspending on excess capacity.

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Michael Pettis @michaelpettis.bsky.social · 6d

7/9
That's the problem in China. As long as local government provide unlimited financial support to "their" EV producers, there is no reason for excess capacity to lessen until the financial system itself is no longer able to continue financing the accumulating losses.

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Michael Pettis @michaelpettis.bsky.social · 6d

6/9
An economy that is able to ignore hard budget constraints because of politically-determined support by the financial system, Kornai warned, inevitably gets mired in long periods of non-productive investment, rising debt, and an eventual (and difficult) forced adjustment.

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Michael Pettis @michaelpettis.bsky.social · 6d

5/9
The hard budget constraint resolves this by generating bankruptcy losses that reverse the previous GDP impact. Hard budgets, in other words, not only discipline non-productive activity, but also keep reported GDP growth broadly in line with the real growth in the underlying economy.

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Michael Pettis @michaelpettis.bsky.social · 6d

4/9
What is more, non-productive investments falsely add to GDP growth in the short term because the GDP calculation has no way of distinguishing between productive and non-productive investment.

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Michael Pettis @michaelpettis.bsky.social · 6d

3/9
In market economies, Kornai argued, the hard-budget constraint prevents entities from persistently investing in loss-making activities unless investors believe that future profits are likely to be enormously large. It is economics, not politics, that determines the extent of investment.

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Michael Pettis @michaelpettis.bsky.social · 6d

2/9
This is a very appropriate example of János Kornai's distinction between economies that operate under hard-budget constraints and those that operate under soft-budget constraints. The hard-budget constraint sets a limit to the extent of losses a business can have.

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Michael Pettis @michaelpettis.bsky.social · 6d

1/9
FT: " UBS's Paul Gong played down the chances of an EV industry-wide consolidation in the near term, as deep financial support for lossmaking groups from provincial governments and capital markets stands in the way."
www.ft.com/content/5f73...

Can China stop its EV price wars?

Carmakers fear falling behind on scale and technology even as profit margins drop and officials lambast extreme discounting

www.ft.com

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Michael Pettis @michaelpettis.bsky.social · 6d

8/8
In a way you can say that it wasn't ISI that led to the terrible debt crisis of the 1980s, but rather its sudden, sharp reversal during the mid and late 1970s. Blaming ISI for the crisis was always more of an ideological tactic than it was an empirical observation.

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Michael Pettis @michaelpettis.bsky.social · 6d

7/8
Among the most important of these changes were surges in the value of Latin American currencies, which became among the most expensive in the world. The irony, of course, was that appreciating currencies effectively reversed the whole point of the ISI policies.

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Michael Pettis @michaelpettis.bsky.social · 6d

6/8
As I often point out, any forced change in a country's external imbalances must force changes in its internal imbalances. The sudden massive net capital inflows into Latin American economies necessarily caused a massive transformation of their economies.

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Michael Pettis @michaelpettis.bsky.social · 6d

5/8
With OPEC nations pouring vast sums into the international banking system, these had to be recycled, and were mostly recycled into developing countries, and especially into Latin America, the most credible of developing countries at the time.

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Michael Pettis @michaelpettis.bsky.social · 6d

4/8
A much more plausible reason is the 10-fold surge in oil prices during the 1970s, not because the cost of energy rose (in fact many countries in Latin American produced and even exported oil) but rather because of its impact on capital flows.

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Michael Pettis @michaelpettis.bsky.social · 6d

3/8
In fact at the time, it was widely accepted that several of the larger Latin American economies would reach European levels of development before the end of the century.

That all came apart by the end of the 1970s, but to blame it on ISI makes little sense.

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Michael Pettis @michaelpettis.bsky.social · 6d

2/8
This is an incredibly common misperception. The ISI period ran mainly from the late 1930s to the early 1970s, and peaked in the 1950s and 1960s. During this period, the ISI economies in Latin America grew extraordinarily quickly and produced many of the first development "miracles" in history.

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Michael Pettis @michaelpettis.bsky.social · 6d

1/8
Eduardo Porter argues in this FT piece that Latin America's import substitution industrialization (ISI) in the 1960s and 1970s "ended in a massive debt crisis that ushered in a period of economic decline known across the region as the “lost decade”."
www.ft.com/content/2f9d...

Going back to the 1970s won’t save Mexico

Embracing protectionism to prevent Chinese dumping and appease Trump will fail — just like import substitution did

www.ft.com

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Michael Pettis @michaelpettis.bsky.social · 6d

I think that is at least as much a political question as it is an economic question.