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.
