Michael Pettis on Persistent Imbalances in Post-Pandemic China

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

So Joe, it has to be said that there are many ironies to come out of the coronavirus crisis, but one of the big ones has to do with the fact that the outbreak started in China in early 2020, and yet China had the best-performing economy that year.

Joe Weisenthal (0:37)

Yeah, I think it was the only major economy that actually grew overall in 2020, which is pretty extraordinary.

And I don't really know if it's true or if it will be durably true, but I do think there's this sort of meme out there that like China won 2020 in some way that it came out ahead. And I don't actually, I haven't yet necessarily been convinced of it, but because of China's growth and the quick rebound and its successful suppression of the virus, that is like a thing people say.

Tracy Alloway (1:10)

Yeah. So China's GDP grew, I think it was 2.3% last year, which means it was the only major economy, as you mentioned, to escape contraction, which is pretty amazing. And then of course, people have been pitching China's experience in 2020 as sort of like proof of the benefits of a command economy. When you have something like an outbreak in a country with a very strong government, you can control the population, you can put in place restrictions and things that are ultimately going to make it easier to fight the virus. And of course, you can pull a bunch of levers to boost economic activity as well. So most people have been talking about what an exceptional year it was for China, sort of proves that their economic model might be more resilient than some people think.

But there are people out there who think that actually 2020 wasn't as good a year for China as it's been portrayed, and that if anything, China is coming out of 2020 in a more vulnerable position.

Joe Weisenthal (2:18)

Yeah, I don't think there's, you know, it seems too early to know, right? So yes, it grew.

I'm thinking back to our episode with Dan Wong from a few weeks ago, where he said like his lessons from 2020 were A, that on some level, the government is more tough and brutal than he appreciated, but also in his view that there's a can-do spirit to Chinese business and the economy that he thinks is unmatched elsewhere. But I still think that, you know, regardless of what the situation is right now, it's very much a jump ball, open question of what the long-term economic ramifications are going to be from this extraordinary past 12 months, basically.

Tracy Alloway (3:01)

Right. Of course, time will ultimately tell, but given that we are coming up to the one-year anniversary of, or by the time we release this episode, we'll probably be in the midst of the one-year anniversary of the big market sell-off and the virus really sort of expanding in the rest of the world. I think the China experience is worth discussing, and of course, we can talk about whether or not the strength that we saw in 2020 A exists and B will continue into 2021 So I'm happy to say we have the perfect person on to talk about this, someone who's been on Odd Lots before. It's Michael Pettis, finance professor over at Peking University and a senior fellow at the Carnegie-Tsinghua Center.

Everyone enjoys his thoughts on China. He's probably one of the best China commentators out there. So we're really grateful to have him on the program again. Michael, thanks for coming on.

Michael Pettis (3:57)

Thank you. So great to be back.

Tracy Alloway (3:59)

So did we get that right? China had 2.3% GDP growth in 2020 Lots of commentators described that as proof of Chinese exceptionalism, proof of the economic model. But you've written that you saw it slightly differently.

What was China's year like for you? How strong was the economy actually?

Michael Pettis (4:22)

Well, the first point that I make pretty often and probably the last time we spoke is that GDP in China means something very different than it means in other countries. GDP in China is an input.

And in other countries, it's a measure of output. And that makes it non-comparable. What happened last year in China is that there are basically two types of growth that Beijing focuses on. There is what we call a high-quality growth, which is really the growth in consumption, the growth in business investment, which is closely tied to the growth in consumption, and growth in exports.