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August 28, 2011

Professor Michael Pettis Makes Predictions from now to 2020 including predicting a slowdown to 3% GDP growth for China

Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business.

One of the core arguments that Michael Pettis is using for his predictions is outlined in his case 'The Contentious Debate Over China's Economic Transition' (8 pages)

BTW - Nextbigfuture disagrees with these Michael Pettis predictions, but finds them interesting and from a fairly competent source. I think China's underground economy makes the actual household consumption amounts higher than the official levels.

Michael Pettis predictions are:

* BRICS and other developing countries have not decoupled in any meaningful sense, and once the current liquidity-driven investment boom subsides the developing world will be hit hard by the global crisis.
* Over the next two years Chinese household consumption will continue declining as a share of GDP.
* Chinese debt levels will continue to rise quickly over the rest of this year and next.
* Chinese growth will begin to slow sharply by 2013-14 and will hit an average of 3% well before the end of the decade.
* Any decline in GDP growth will disproportionately affect investment and so the demand for non-food commodities.
* If the PBoC resists interest rate cuts as inflation declines, China may even begin slowing in 2012.
* Much slower growth in China will not lead to social unrest if China meaningfully rebalances.
* Within three years Beijing will be seriously examining large-scale privatization as part of its adjustment policy.
* European politics will continue to deteriorate rapidly and the major political parties will either become increasingly radicalized or marginalized.
* Spain and several countries, perhaps even Italy (but probably not France) will be forced to leave the euro and restructure their debt with significant debt forgiveness.
* Germany will stubbornly (and foolishly) refuse to bear its share of the burden of the European adjustment, and the subsequent retaliation by the deficit countries will cause German growth to drop to zero or negative for many years.
* Trade protection sentiment in the US will rise inexorably and unemployment stays high for a few more years.




A huge recycling of liquidity, combined with out-of-control Chinese fiscal expansion (through the banking system), has caused a surge in asset and commodity prices that will have temporarily masked the impact of global demand contraction for BRICs. But it won’t last. By the middle of this decade the whole concept of BRIC decoupling will seem faintly ridiculous.

* By 2013 Chinese household consumption will still not have exceeded the 35% of Chinese GDP reached in 2009. In fact it will probably be lower.

Premier Wen listed the need to raise the consumption share of GDP second in his speech last March before the unveiling of the new Five-Year Plan. This time, the message seems to be, they are serious about doing it.

But I remain very, very skeptical. Low consumption levels are not an accidental coincidence. They are fundamental to the growth model, and the suppression of consumption is a consequence of the very policies – low wage growth relative to productivity growth, an undervalued currency and, above all, artificially low interest rates – that have generated the furious GDP growth. You cannot change the former without giving up the latter. Until Beijing acknowledges that it must dramatically transform the growth model, which it doesn’t yet seemed to have acknowledged, consumption will continue to be suppressed.

* By 2013-14 Chinese GDP growth will slow sharply, and by 2015-16 predictions of a sustained period of growth rates at 3% or lower will no longer seem outlandish.

I don’t expect a significant growth slow-down until after the new leadership takes power in late 2012, but my guess (and hope) is that by 2013 the stubborn refusal of consumption to rise as share of GDP, and the continuing surge in debt, will have convinced all but the most recalcitrant that China needs a dramatic change of policy. The longer we wait, the more debt there will be and the more pressure there will be on Beijing to use household wealth transfers to service the debt.

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