Odd Lots Michael Pettis on What Evergrande Means for China’s Macro Economy
Oct 11, 2021
Michael Pettis, a finance professor at Peking University and a senior fellow at the Carnegie Endowment for International Peace, dives into the cascading effects of the Evergrande crisis on China's economy. He discusses the crucial relationship between real estate and GDP, and the implications for household wealth and consumption. Pettis also highlights the challenges of transitioning from a debt-heavy growth model to a more sustainable one, alongside the complexities of income inequality and the potential for redistributing wealth amid significant political obstacles.
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Evergrande's Significance
- Evergrande's importance lies in its symptom of widespread issues within the Chinese property sector.
- The property sector is a large part of China's GDP, roughly 25-30%, twice the expected amount in other countries.
China's Real Estate Dependence
- Real estate investment is disproportionately high in China at 13% of GDP, compared to 5% in the U.S.
- Homeownership makes up approximately 80% of household wealth in China, more than double most other countries and significantly higher than even Japan's bubble.
China's Dual Growth Model
- China's "three red lines" policy triggered Evergrande's issues, but the core problem lies in the overreliance on non-productive investment.
- China's growth consists of sustainable growth (consumption, exports, business investment) and residual growth (property and infrastructure investment) used to reach GDP targets.
