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from MacroScope:

China bear Pettis says world coming around to his view

Few mainstream economists have been quite as downbeat on China as Peking University professor and noted China watcher Michael Pettis. Pettis has long held that the world's No. 2 economy will grow at a maximum of 3.5 percent a year for the rest of the decade, well below a consensus call that appears to have settled into the 5-7 percent range. "And honestly, I think if I'm wrong, it will be to the downside rather than the upside," he told Reuters.

Lately, though, Pettis says that many people inside China and in some of the countries whose fortunes are tightly tied to its economy are starting to come around to his point of view. At a recent lunch with visiting European Union officials, Pettis said the mood among the attending Chinese economists, academics, think-tankers and policy advisors was universally gloomy. “I'm used to being the most pessimistic guy in the room, but in this case, they were much worse than I."

Pettis says that's because the Chinese understand, far better than the average Western investor or economist, just how tough it’s going to be to rebalance from investment to consumption and shift wealth from the state to Chinese households.

There are many ways China can rebalance, but none is without difficulty. A steady, gradual rise in the exchange rate, interest rates and wages would help enrich households and wean exporters off their generous state subsidies but could also stoke inflation. Moving more swiftly could sink the economy as exporters go out of business and people lose their jobs.

Mass privatization, Pettis said, would help revitalize the economy but would likely face stiff political resistance.

How about having the state take over private sector debt, keeping companies humming along and people employed? Pettis points to Japan, which followed that route in the 1990s and today faces a crushing public debt burden at 200 percent of GDP.

When people ask me if China will have a hard landing or a soft landing, I find that whole discussion useless. What I think we'll have is a long, bumpy landing. If growth rates slow too much, they will step on the credit accelerator. But then they’ll get the wrong kind of growth and they’ll apply constraints to slow it down again. So my guess is we’ll get this very jagged growth, with the peaks lower each time and the troughs lower each time. I don’t expect it to be a straight line.

from Davos Notebook:

Davos 2011: More people, fewer resources, big risk

Among the major issues global leaders will discuss at the upcoming annual World Economic Forum in Davos are the risks associated with the tightening of water, food and energy resources to meet the demands of an increasing global population.

The three interrelated resources impact both global economic growth and geopolitical stability and the Forum’s Global Risks 2011 report warns that “any strategy that focuses on one part of the water-food-energy nexus without considering its interconnections risks serious unintended consequences.”

Three recent news stories illustrate the risks associated with these precious resources.

Water

The situation in Yemen provides a perfect illustration of the growing problem countries face when it comes to fresh water supplies. Yemen’s population is increasing – exploding really. Currently at 23 million, it’s forecast to double in the next 20 years. Thanks to drought and overconsumption, the water is running out and farmers are abandoning their land for the cities.

A nonprofit network and affiliate of the policy think tank Pacific Institute called Circle of Blue offers 19 solutions to the global freshwater crisis here.

Food