Monetary Matters with Jack Farley China’s Involution Trap | Michael Pettis on China's Excess Savings, Industrial Overcapacity, and Exporting of Deflation
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Nov 30, 2025 
Michael Pettis, a Senior Fellow at the Carnegie Endowment for International Peace, discusses China's economic dynamics and the concept of 'economic involution.' He explores how China's suppressed consumption fuels global imbalances and the risks associated with shifting from real estate to manufacturing bubbles. Pettis argues that current tariffs fail to address systemic issues, merely redirecting trade flows. He proposes that China must significantly boost household consumption to avoid economic stagnation, emphasizing the need for radical solutions to tackle growing debt and deflation.
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Domestic And External Imbalances Are Linked
- Domestic imbalances must always match external imbalances via savings minus investment.
- A country's external account choices force trade and industrial outcomes onto its partners.
Surplus Countries Shape Global Manufacturing
- Countries that control external accounts can subsidize manufacturing and shape global industrial structure.
- Deficit countries lose manufacturing because their trade partners choose to expand manufacturing exports.
Investment Shifts Created Manufacturing Involution
- China shifted investment from infrastructure to property to manufacturing to avoid GDP slowdown, creating repeated bubbles.
- That created 'involution' where excess manufacturing capacity produced below-cost output and exported deflation.
