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
July 12, 2014 -- Updated 1815 GMT (0215 HKT)
To prevent war with North Korea over a comedy, what would Dennis Rodman say to Kim Jong Un? Movie critic Gene Seymour weighs in.
July 11, 2014 -- Updated 1315 GMT (2115 HKT)
Michael Werz says in light of the spying cases, U.S. is seen as a paranoid society that can't tell friends from foes.
July 11, 2014 -- Updated 1317 GMT (2117 HKT)
Eric Liu explains why in his new book, he calls himself "Chinese American" -- without a hyphen.
July 11, 2014 -- Updated 1512 GMT (2312 HKT)
John Bare says hands-on learning can make a difference in motivating students to acquire STEM skills.
July 11, 2014 -- Updated 1320 GMT (2120 HKT)
Karl Alexander and Linda Olson find blacks and whites live in urban poverty with similar backgrounds, but white privilege wins out as they grow older.
July 10, 2014 -- Updated 1620 GMT (0020 HKT)
Frida Ghitis says a poll of 14 Muslim-majority nations show people are increasingly opposed to extremism.
July 10, 2014 -- Updated 1828 GMT (0228 HKT)
Ruben Navarrette says spending more on immigation enforcement isn't going to stop the flow of people seeking refuge in the U.S.
July 10, 2014 -- Updated 2048 GMT (0448 HKT)
Faisal Gill had top security clearance and worked for the Department of Homeland Security. That's why it was a complete shock to learn the NSA had him under surveillance.
July 10, 2014 -- Updated 1841 GMT (0241 HKT)
Kevin Sabet says the scientific verdict is that marijuana can be dangerous, and Colorado should be a warning to states contemplating legalizing pot.
July 9, 2014 -- Updated 2047 GMT (0447 HKT)
World War I ushered in an era of chemical weapons use that inflicted agonizing injury and death. Its lethal legacy lingers into conflicts today, Paul Schulte says
July 10, 2014 -- Updated 1137 GMT (1937 HKT)
Tom Foley and Ben Zimmer say Detroit's recent bankruptcy draws attention to a festering problem in America -- cities big and small are failing to keep up with change.
July 10, 2014 -- Updated 1201 GMT (2001 HKT)
Mel Robbins says many people think there's "something suspicious" about Leanna Harris. But there are other interpretations of her behavior
July 9, 2014 -- Updated 1753 GMT (0153 HKT)
Amy Bass says Germany's rout of Brazil on its home turf was brutal, but in defeat the Brazilian fans' respect for the victors showed why soccer is called 'the beautiful game'
July 9, 2014 -- Updated 2107 GMT (0507 HKT)
Aaron Carroll explains how vaccines can prevent illnesses like measles, which are on the rise
July 9, 2014 -- Updated 0008 GMT (0808 HKT)
Aaron Miller says if you think the ongoing escalation between Israel and Hamas over Gaza will force a moment of truth, better think again
July 8, 2014 -- Updated 1903 GMT (0303 HKT)
Norman Matloff says a secret wage theft pact between Google, Apple and others highlights ethics problems in Silicon Valley.
July 8, 2014 -- Updated 2237 GMT (0637 HKT)
The mother of murdered Palestinian teenager Mohammed Abu Khder cries as she meets Palestinian president Mahmoud Abbas in Ramallah, West Bank on July 7, 2014.
Naseem Tuffaha says the killing of Israeli teenagers has rightly brought the world's condemnation, but Palestinian victims like his cousin's slain son have been largely reduced to faceless, nameless statistics.
ADVERTISEMENT