Skip to main content

Will China's economy crash?

By Michael Pettis, Special to CNN
July 29, 2013 -- Updated 1456 GMT (2256 HKT)
STORY HIGHLIGHTS
  • Michael Pettis: Some experts think that China's economy is in big trouble
  • Pettis: Most likely, China's growth rate will decline in the coming years
  • He says the country needs to shift from investment to consumption model
  • Pettis: If China recalibrates its economy in the right way, everyone will benefit

Editor's note: Michael Pettis is a professor of finance at Peking University, a senior associate at the Carnegie Endowment for International Peace and author of "The Great Rebalancing" (Princeton University Press).

(CNN) -- After many years of euphoria over China's rapid growth and the country's apparently inevitable rise to global economic dominance, the China story has taken a serious turn for the worse. China, it now seems, is about to collapse, and along the way it may well bring the world economy down with it.

Fortunately, the new story may be as muddled as the old one.

China's economic model has relied heavily on investment and debt. It shouldn't be a surprise that after many years of tremendous growth driven at first by badly needed investments, Chinese spending on infrastructure and manufacturing capacity is slowing down.

During the same period, debt levels surged as borrowed money poured into more highways, airports, steel mills, shipyards, high-speed railways, and apartment and office buildings than the country could productively use.

Michael Pettis
Michael Pettis

A few economists predicted as far back as 2006 that China would face a serious debt problem. By 2010, it became obvious even to the most excited of China bulls that this was indeed happening.

To protect itself from the risk of a debt crisis, China must bring spending to a halt. Beijing now wants to rebalance the economy away from its excessive reliance on investment and debt, and to increase the role of consumption as a driver of growth.

But this cannot happen except at lower growth rates.

China debt
Fareed's Take: China's slowing growth

So what happens next -- will China collapse? Probably not. A financial collapse is effectively a kind of bank run, and as long as government credibility remains high, banks are guaranteed and capital controls are maintained, it is unlikely that China will experience anything like a bank run.

What is far more likely is that in the coming years, China's gross domestic product growth rate will continue to decline as the country focuses on stimulating consumption.

Growth rates during the administration of President Xi Jinping are unlikely to exceed 3% to 4% on average if the economic rebalancing is managed well.

Will the slower growth rate be a disaster for China? Certainly, it would be huge departure from the growth rate of roughly 10% a year for nearly three decades. Would much lower growth rates create high unemployment and huge dislocations for the economy? Some are worried about such scenarios. But the Chinese economy has so far shown a lot of resilience despite passing storms such as the global financial crisis.

Beijing has huge challenges ahead. China's growth has been a boon to large businesses, the state, the powerful and the wealthy elite. What the Chinese government needs to do is recalibrate growth so that average household incomes can rise and consumers have more money to spend.

This will not be easy to pull off, but there are positive signs. Xi's government seems determined to make the necessary changes, even at the expense of much slower growth.

Even if GDP growth declines but average Chinese household income grows at 5% to 6% a year, it would put China in the right direction.

As for the rest of the world, there's no reason to panic over China's economic slowdown. Contrary to popular beliefs, China is not the global engine of growth; it is merely the largest arithmetic component of global growth. What drives global growth is demand. China, with a large trade surplus, is not a net provider of demand to the world.

What matters to the world, in other words, is not how fast China grows but rather, how its trade with foreign partners evolves. If China rebalances in an orderly way, its imports of manufactured goods and services should rise faster than its exports. This will be good for the world.

What's more, manufacturing industries around the world that lost out to China in the export business will benefit. When wages rise for Chinese workers -- so that they have more money to buy goods and services at home -- it means other developing countries will have a chance to compete for exports if they offer lower labor wages.

There is no doubt that Beijing has a long road ahead in terms of managing a huge economy, but as of now there should be nothing surprising or unexpected about the slowing growth of China. It will probably benefit the Chinese people and the global economy.

Follow us on Twitter @CNNOpinion.

Join us on Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Michael Pettis.

ADVERTISEMENT
Part of complete coverage on
December 20, 2014 -- Updated 0242 GMT (1042 HKT)
Conservatives know easing the trade embargo with Cuba is good for America. They should just admit it, says Fareed Zakaria.
December 20, 2014 -- Updated 0112 GMT (0912 HKT)
We're a world away from Pakistan in geography, but not in sentiment, writes Donna Brazile.
December 19, 2014 -- Updated 1709 GMT (0109 HKT)
How about a world where we have murderers but no murders? The police still chase down criminals who commit murder, we have trials and justice is handed out...but no one dies.
December 18, 2014 -- Updated 2345 GMT (0745 HKT)
The U.S. must respond to North Korea's alleged hacking of Sony, says Christian Whiton. Failing to do so will only embolden it.
December 19, 2014 -- Updated 2134 GMT (0534 HKT)
President Obama has been flexing his executive muscles lately despite Democrat's losses, writes Gloria Borger
December 18, 2014 -- Updated 1951 GMT (0351 HKT)
Jeff Yang says the film industry's surrender will have lasting implications.
December 18, 2014 -- Updated 2113 GMT (0513 HKT)
Newt Gingrich: No one should underestimate the historic importance of the collapse of American defenses in the Sony Pictures attack.
December 10, 2014 -- Updated 1255 GMT (2055 HKT)
Dean Obeidallah asks how the genuine Stephen Colbert will do, compared to "Stephen Colbert"
December 18, 2014 -- Updated 1734 GMT (0134 HKT)
Some GOP politicians want drug tests for welfare recipients; Eric Liu says bailed-out execs should get equal treatment
December 18, 2014 -- Updated 1342 GMT (2142 HKT)
Louis Perez: Obama introduced a long-absent element of lucidity into U.S. policy on Cuba.
December 16, 2014 -- Updated 1740 GMT (0140 HKT)
The slaughter of more than 130 children by the Pakistani Taliban may prove as pivotal to Pakistan's security policy as the 9/11 attacks were for the U.S., says Peter Bergen.
December 17, 2014 -- Updated 1600 GMT (0000 HKT)
The Internet is an online extension of our own neighborhoods. It's time for us to take their protection just as seriously, says Arun Vishwanath.
December 16, 2014 -- Updated 2154 GMT (0554 HKT)
Gayle Lemmon says we must speak out for the right of children to education -- and peace
December 17, 2014 -- Updated 1023 GMT (1823 HKT)
Russia's economic woes just seem to be getting worse. How will President Vladimir Putin respond? Frida Ghitis gives her take.
December 17, 2014 -- Updated 0639 GMT (1439 HKT)
Australia has generally seen itself as detached from the threat of terrorism. The hostage incident this week may change that, writes Max Barry.
December 12, 2014 -- Updated 2020 GMT (0420 HKT)
Thomas Maier says the trove of letters the Kennedy family has tried to guard from public view gives insight into the Kennedy legacy and the history of era.
December 15, 2014 -- Updated 1456 GMT (2256 HKT)
Will Congress reform the CIA? It's probably best not to expect much from Washington. This is not the 1970s, and the chances for substantive reform are not good.
December 15, 2014 -- Updated 2101 GMT (0501 HKT)
From superstorms to droughts, not a week goes by without a major disruption somewhere in the U.S. But with the right planning, natural disasters don't have to be devastating.
December 15, 2014 -- Updated 1453 GMT (2253 HKT)
Would you rather be sexy or smart? Carol Costello says she hates this dumb question.
December 14, 2014 -- Updated 2253 GMT (0653 HKT)
A story about Pope Francis allegedly saying animals can go to heaven went viral late last week. The problem is that it wasn't true. Heidi Schlumpf looks at the discussion.
December 14, 2014 -- Updated 1550 GMT (2350 HKT)
Democratic leaders should wake up to the reality that the party's path to electoral power runs through the streets, where part of the party's base has been marching for months, says Errol Louis
December 13, 2014 -- Updated 2123 GMT (0523 HKT)
David Gergen: John Brennan deserves a national salute for his efforts to put the report about the CIA in perspective
December 12, 2014 -- Updated 1426 GMT (2226 HKT)
Anwar Sanders says that in some ways, cops and protesters are on the same side
December 11, 2014 -- Updated 1439 GMT (2239 HKT)
A view by Samir Naji, a Yemeni who was accused of serving in Osama bin Laden's security detail and imprisoned for nearly 13 years without charge in Guantanamo Bay
December 14, 2014 -- Updated 1738 GMT (0138 HKT)
S.E. Cupp asks: How much reality do you really want in your escapist TV fare?
ADVERTISEMENT