Michael Pettis’ article provides a bearish short to medium-term view on China’s inevitable shift toward a more consumption-based economy. Highlighting the “distorted national balance sheet, marked by burgeoning debt and decreasing ability to finance that debt,” the Chinese economy is still fragile and developing, which has significant implications for the global economy—especially economies that have higher investment rates than they do saving rates. The “consumption-repressing” Chinese economy presently fosters an elevated savings rate due to relatively low interest rates, an undervalued currency, and slow wage growth (a comment I disagree with, wages have been growing at mid-teens per year over the last decade, decelerating to about 10 percent recently). Still, the rather high savings rate has led to overinvestment. Over the past few years, for example, many analysts have been criticizing the Chinese real estate market. Accounts of whole cities being built before there are any inhabitants have spooked many analysts, rightfully so. Historically speaking, “Every country that has followed a similar consumption-repressing, investment-driven growth model has ended up with an unsustainable debt burden.” This does appear to be the case currently with China. An eventual GDP re-balance will be the result; a natural phenomenon during economic development. Premier Li has focused on making it clear to the public that he intends for china to move away from export dependence and move increasingly toward consumption-based growth. Yet, this change may be at the cost of a recession or slower growth for a period. As China shifts to consumption from savings, the surplus that has financed savings-poor countries will dry up. This may cause difficulty for countries like America and other European economies.
Bloomberg article: http://www.bloomberg.com/news/2013-09-23/china-reforms-face-headwinds-at-home-and-abroad.html