Credit Writedowns

Michael Pettis had a very good post out yesterday that focused on the sectoral balances within and across eurozone countries which I recommend. His point is that excess German savings driven by wage suppression was behind macro imbalances and not thrift. I want to expand upon this theme. My prediction here is that rebalancing away from excess German savings will not occur on nearly a large of scale to matter.

I’ll be watching a number of things in 2013 in order to get a better sense of what the future will bring. On January 22 Princeton University Press will be publishing my book, The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead, and in the last chapter of the book I argue that the great trade, capital flow and debt imbalances the were built up over the preceding two decades must reverse themselves. Imbalances can continue for many years, I argue, but at some point they become unsustainable and the world must adjust by reversing those imbalances.

In China, I have argued many times, high growth is no longer compatible with a strengthening balance sheet. If China is growing at a rate that approaches or exceeds five or six percent, it is probably a safe bet that debt is rising faster than debt servicing capacity.

According to the Financial Times, the Australian mining group Fortescue has moved into expansion mode on the back of robust iron-ore prices that are now at an eight-month high. The reason for the rebound is the reflation efforts of the Chinese government after China experienced a relatively hard landing in property and shares, prompting China to give up on its [...]

By Michael Pettis The big news in the past two weeks has been the slew of economic data suggesting that China has firmly turned the corner on its economic closedown. Growth is up, investment is up, and inflation is down. Here, for example, is the New York Times, a newspaper whose website is no longer available in China without a [...]

By Michael Pettis Three weeks ago the Wall Street Journal published my OpEd piece about concern that China may try to make the rebalancing process less painful by allowing the RMB to depreciate. In the piece I argue that this isn’t as obvious as you might think. From July 2005 to February this year the RMB rose by just over [...]

In the short term rebalancing may increase the amount of global demand absorbed by China, but over the longer term it should reduce it. Rebalancing will inevitably result in falling prices for hard commodities, and so will hurt countries like Australia and Brazil that have gotten fat on Chinese overinvestment. Rising Chinese consumption demand over the long term and lower commodity prices, however, are positive for global growth overall, and especially for net commodity importers. Slower growth in China, it turns out, is not necessarily bad for the world. The key is the evolution of the trade surplus.

Michael Pettis writes that in the current environment is that small and medium enterprises (SMEs) are hurting, and last week’s minimum reserve hike – which came out the same day as the CPI number – will undoubtedly make things worse since any withdrawal of credit is unlikely to affect the top customers (SOEs and local governments) and will fall disproportionately on marginal borrowers.

I have decided to single Klaus Baader out for special treatment here because he conveniently brings together, in a clear and succinct fashion, a number of arguments which are widely accepted and used by both analysts and policy makers about Spain. Unfortunately the fact that arguments are widely held does not make them valid, or in anything other than the most trivial conventialist sense “true”.

The immediate problem is the excess capital investment and the costly maintenance of the projects it has spawned. Longer-term, Asia’s growth prospects look good.

There is a difference between economic growth from mere factor mobilisation and economic growth from increased productivity. One requires a lot more capital investment and debt than the other. If and when capital investment growth slows, expect a lot of losses and then we will have to see how these losses get socialised and whether policy makers double down on the capital investment story.

Is China currently rebalancing? The currency has been appreciating, the PBoC has hiked interest rates four times, and wages have been surging. Because of all of this I am often asked if China has finally begun the long-waited rebalancing process and whether we have yet seen an improvement in the underlying economy caused by a rising consumption share. Those who were hoping the answer was yes will have been disappointed by the release Thursday of the World Bank’s China Quarterly Update – April 2011.