Michael Pettis Explains How China's Changing Economy Will Impact the World
Oct 10, 2023
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Michael Pettis, a senior fellow at the Carnegie Endowment, discusses how China's changing economy will impact the world. They cover topics such as China's weakened economy post-pandemic, the challenges faced by developing countries, the role of the RMB, China's manufacturing sector, and the negative nature of social media reactions to China's projects.
China's reputation and handling of the Israel-Palestine conflict will impact its standing with key players like Israel and Saudi Arabia.
China's likelihood of providing loans to Kenya is uncertain due to concerns over Kenya's debt distress and China's domestic debt issues.
Debt forgiveness is inevitable in the long run, despite China's current lack of interest, as countries unable to pay will reach a point where forgiveness becomes necessary.
Deep dives
China's Relationship with Iran and the Middle East
China's increasingly ambitious diplomatic agenda in the Middle East and its close ties with Iran are under scrutiny in the ongoing Israel-Palestine conflict. China's reputation in the region and its handling of the situation will determine its standing with key players like Israel and Saudi Arabia.
Kenyan President's Request for Chinese Loans
Kenyan President William Ruto plans to request loan restructuring for $6 billion of existing loans owed to China. Additionally, he aims to ask for an additional $1 billion in new loans to support road construction projects in Kenya. However, the likelihood of China providing these loans is uncertain, given concerns over Kenya's existing debt distress and China's own domestic debt issues.
The Chinese Economy and the Savings-Investment Model
The Chinese development model, which involves high savings rates to fund rapid investment, is not unique to China but has been employed by several countries in the past. China's success in maintaining a high savings rate has led to an overinvestment situation, making the economy increasingly dependent on export surpluses. While some developing countries express grievances over the influence of US monetary policy on their currencies, switching away from the US dollar to the renminbi is unlikely to address the underlying challenges related to capital controls and the impossible trinity. Furthermore, the prospect of the renminbi becoming a major international currency is limited.
The pattern of lending to developing countries
The podcast discusses the historical pattern of lending to developing countries by major global powers. It highlights examples like the United States in the 1920s, the Soviet Union in the 1950s, the Arab OPEC nations in the 1970s, and Japan in the 1980s. In each case, there was an initial phase of exuberant lending, followed by a realization of the risks involved, leading to a sharp contraction in lending. The podcast also mentions China's experience, which followed a similar pattern after facing repayment difficulties from countries like Venezuela in 2015-2016, leading to a contraction in Chinese lending abroad since then.
Debt forgiveness and China's approach
The podcast explores China's approach to debt forgiveness and cancellation. It mentions that China has not shown an interest in debt cancellations and does not have the experience of going through long and difficult debt restructurings that end with forgiveness. The centralization of decision-making in China also makes it challenging to propose or sell the idea of debt forgiveness. However, the podcast suggests that debt forgiveness is inevitable in the long run, as countries that cannot pay will eventually reach a point where debt forgiveness becomes necessary. It emphasizes the importance of recognizing the benefits of debt forgiveness for creditor nations and the overall economy, despite the complexities involved.
China's economy emerged from the pandemic much weaker than before. Unemployment is up, exports are down and a burgeoning property crisis is having a devastating impact on local government finances.
These changes in the economy are happening very fast, so quickly that's it difficult for experts to keep pace with what's happening, much less among those who don't closely follow Chinese economic trends -- particularly in developing countries.
Michael Pettis, a senior fellow at the Carnegie Endowment for International Peace, is one of the world's foremost scholars on the Chinese economy. He joins Eric this week to discuss how the dramatic changes that are now taking place in China will impact countries throughout the Global South.
SHOW NOTES:
Amazon: Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace: https://amzn.to/46Iiqel
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