Michael Pettis

7/7
But they have written an important paper that recognizes a)the role of economic policies in mercantilist countries in creating global trade imbalances, and b)the way these imbalances are transmitted largely through the capital account.

Foreign Capital Inflows Don’t Lower U.S. Interest Rates Contrary to conventional thinking, net foreign capital inflows do not lower American interest rates (unless they do so by raising U.S. unemployment). A tax on foreign inflows is therefore unlikely to ...

6/7
I don't necessarily agree with the authors that the way to do so is by reducing the fiscal deficit. As I see it, as long as foreign inflows into the US don't boost domestic investment, they must be balanced either by higher unemployment or higher debt.
carnegieendowment.org/china-financ...

5/7
resulting internal imbalances by exporting them through their external accounts, which means acquiring foreign demand (and foreign assets) from abroad, This suggests that the most efficient way for the US to address trade imbalances is to address capital account imbalances.

4/7
I agree. It is mainly the capital account imbalances that drive trade account imbalances, and not the other way around, as most economists still assume. Countries that decide to boost manufacturing growth through subsidies that reduce domestic demand must balance the...

3/7
The result, the authors conclude is that "the most persistent driver of America's unsustainably large trade deficit is foreign investment in the United States, not other countries' trade barriers."

2/7
"Dollar assets", they add, "are also the primary outlet for excess saving in economies suffering from chronically deficient aggregate demand."

The origins of the US trade deficit and the futility of tariffs The most persistent driver of America's unsustainably large trade deficit is foreign investment in the United States, not other countries' trade barriers. If President Donald Trump manages to shrink t...

1/7
PIIE's Tamim Bayoumi and Joseph E. Gagnon: "The uniquely large and safe US financial system makes dollar assets the natural target for mercantilist foreign governments seeking to hold their currencies down in support of their exports. "

www.piie.com/blogs/realti...

2/2
It makes no sense, for example, for Washington to put high tariffs on Canada and India, two deficit economies that, rather than contribute to global imbalances, actually help resolve them. The US instead should be working with them to fix the global trading system.

Trump’s highly political tariffs Brazil is an egregious example of how trade levies are being shaped by presidential whim

1/2
Using trade policy for political purposes is a very bad idea. Instead of resolving the economic problems, including deindustrialization, that large, persistent trade imbalances create for the US economy, it can often make them worse.

www.ft.com/content/ce57...

Sales at China’s Top 100 Builders Fall Over 13% in First Seven Months

Yicai: "China’s top 100 property developers saw their sales shrink more than 13 percent in the first seven months of the year, according to the China Index Academy."
www.yicaiglobal.com/news/sales-a...

5/5
For all the hype about all Beijing is doing to boost the role of consumption in driving growth, in other words, it's pretty clear that this hasn't happened yet. Chinese growth in recent year has really been about the growing role of net exports in driving growth.

4/5
In the pre-COVID years, consumption typically accounted for around 60% of Chinese GDP growth. Last year it accounted for 45% of GDP growth, and so far this year it accounted for 52% of GDP growth. This compares with an average contribution globally of around 75%.

3/5
The contributions of final consumption, net exports and gross capital formation to GDP growth in H1 were 52%, 31% and 17% respectively, which shows how important net exports have been to Chinese growth, and how low the contribution of consumption.

2/5
In fact 68.8% is an extremely low number, and well below its already-low average since 2020 in which, according to another Xinhua article on the same day, domestic demand contributed 86.4%.
english.news.cn/20250801/1fd...

1/5
Xinhua: "The economic performance in the first half of the year demonstrated strong resilience, with domestic demand contributing 68.8% to GDP growth and continuing to serve as a driving force for expansion, according to NDRC official Zhou Chen."
english.news.cn/20250801/12d...

China Proposes Negative List for Gov't-Backed Funds to Prevent Misguided Investments

Yicai: "As of last December, China had nearly 2,180 government-guided funds, with a target size of about CNY12.84 trillion and a subscribed capital of around CNY7.70 trillion."

This is equal to 5.7% and 9.5%, respectively, of that year's GDP.
www.yicaiglobal.com/news/china-p...

I agree this is a valuable article, and Michael's thoughts on it are well worth reading.

I have a few misgivings about it, and more broadly about this entire genre of articles about what we can learn from China's approach to industrial policy, and why we need to.

8/8
The irony is that "vicious" price declines have probably been the most effective way of boosting the household (and consumption) share of GDP, at the expense of businesses and, eventually, local governments, in which case "resolving" one problem may just make the other worse.

7/8
The point is that it will only be when the bulk of credit creation is directed to boosting consumption, or when Beijing is willing to tolerate much more sustainable GDP growth rates, that low consumption or excess price competition will begin to be resolved.

6/8
The fact that the debt is growing so much more quickly suggests that Beijing's solution to overinvestment in one sector of the economy has always been to shift the direction of lending in ways that create overinvestment in another sector of the economy.

5/8
The proof is in the pudding. As debt pours into various forms of investment, if this investment were economically justified, China's GDP would grow at least as quickly as the growth in the debt used to fund investment.

4/8
If Beijing cuts capacity in industries suffering from overcapacity, how can China achieve its GDP growth target except by forcing local governments to create additional excess capacity in infrastructure, or by shifting overcapacity to other manufacturing sectors?

3/8
Each is the structural consequence of a growth model in which excessively high GDP growth targets must be met, with the main driver of this growth being transfers from the household sector to subsidize investment and manufacturing.

2/8
Like the promise to boost consumption, the promise to cut capacity in industries suffering from overcapacity is based on a failure to understand the causes of the problem. Neither weak domestic consumption nor excess capacity is caused by administrative oversight.

China's leaders vow support for economy, crackdown on disorderly competition China's top leaders have pledged to support an economy that is facing various risks, by managing what is viewed as disorderly competition and beefing up capacity cuts in key industries in the second half of the year.

1/8
Reuters: "China's top leaders have pledged to support an economy that is facing various risks, by managing what is viewed as disorderly competition and beefing up capacity cuts in key industries in the second half of the year."

www.reuters.com/world/china/...

8/8
If the latter happens (and it almost certainly is happening), the result will be the global contraction in trade that Joan Robinson said was the inevitable consequence of a world of beggar-thy-neighbor trade imbalances.

7/8
This obviously isn't sustainable. Either we need to reform the global trading system so as to limit the ability of major economies to externalize their internal imbalances, or all economies will eventually choose to protect themselves by raising trade and capital barriers.

Which Country Should Design U.S. Industrial Policy? The decision Americans must make about industrial policy is whether policies that drive the nature and direction of the U.S. economy should be designed at home or abroad by its trade partners. In a hy...

6/8
imbalances in countries that choose not to. To put it another way, this is an example of how one country's industrial policies can also become the industrial policies (in reverse) of another country, whether that benefits or harms the latter.
carnegieendowment.org/china-financ...

5/8
from the US economy by Washington, also for wholly domestic reasons. This is an example of how, in a hyperglobalized world, policies which change the internal imbalances in countries that choose to control their trade and capital accounts also automatically change internal...

4/8
This shift would not occur because EU citizens, EU governments or the ECB wanted it to occur. It would be an automatic structural shift in the EU economy caused by an expansion in manufacturing that was engineered by Beijing for wholly domestic reasons and diverted away...