Michael Pettis on What Evergrande Means for China’s Macro Economy

Joe Weisenthal (0:10)

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

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

So Tracy, we've been talking about China a fair amount, obviously, on the podcast. We did that great episode on Evergrande with Travis Lundy. We've been talking about how some of the reforms fit in with the broader vision with Isabella Weber, some of the tech and other industrial policy changes with Dan Wong. But it still feels like we haven't quite, I guess I would say, put all of the macro pieces together.

Tracy Alloway (0:48)

No, I don't think we've connected the dots between all of those different developments and talked about their actual impact on the economy. And I mean, I don't know. To me, the big question around all of this, what's happening in the property market right now with Evergrande and what's been happening with the tech crackdowns and various other crackdowns, to me, it's just the timing. Why decide to do all of this right after a global pandemic when you could argue that economic recovery might be relatively fragile? Yeah. And again, we're sort of seeing the impact in the property sector now, right? So China introduced this three red lines policy last year in order, presumably, to strengthen its real estate market.

And fast forward a year later, it seems like that's actually caused quite a lot of tensions.

So, yeah, I don't know. To me, it's still sort of a mystery.

Joe Weisenthal (1:48)

Yeah, and there are some interesting things. So like even take Evergrande, for example, and obviously, there are the sort of like initial effects like on, okay, who is going to be left holding the bag for the losses? And I think that's still TBD, right? Like, we don't really know how the sort of like economic losses will be distributed among creditors, among regional finance chiefs, among people who may have put down a down payment for a home and so forth. And then there's sort of like glimmers of like macro impact. And you read these stories about commodities piling up in places where the home real estate development is slowing and rebar and other assets piling up. And so, okay, then there's a commodity spillover, et cetera.

And you know, it's interesting you mentioned like why now. And of course, coming out of the 2008-2009 great financial crisis, China was seen as like one of the demand engines of the world. Like so much of the demand was coming from China.

Very different dynamic right now from a sort of global spillover standpoint, where there is a lot of global demand for Chinese goods, but not a huge demand impulse, it would seem, coming from China itself.

Tracy Alloway (3:06)

So we kind of need to have two conversations. So we need to talk about what all these recent developments actually mean for China's economy domestically. And then of course, we have to have even bigger conversation about what those changes actually mean for China's role in the global economy.

Joe Weisenthal (3:25)

Absolutely. And there's one other twist in all this, which is there is this global energy crisis right now and natural gas prices are surging and China is not escaping that. In fact, China energy prices are surging in China and the sort of curbs on energy consumption and they don't fully understand how that what's going on or how that plays into it anyway.

We have the perfect guest, I believe, to talk about the domestic impacts and then the global ramifications. He's been on the odd lot several times. We had to get him back for this moment. We're going to be speaking, of course, to Michael Pettis, Finance Professor at Peking University and the scholar at the Carnegie Endowment and of course, the co-author of the book last year, Trade Wars are Class Wars. Professor Pettis, thank you so much for coming back on Odd Lots.

Michael Pettis (4:11)

My pleasure as always.

Joe Weisenthal (4:13)

Well, let's just start with, I guess, the sort of like, I guess I would say the first order effects, and we'll probably get into second and third and fourth order effects.

But you know, the big news, obviously Evergrande, we don't really know how that story is going to play out. Kind of like I said at the beginning, there's going to, you know, we don't know how the economic losses from that implosion will be distributed. But what is your view sort of a big picture of what that means for the Chinese economy? Sort of the most straightforward take you have?

Michael Pettis (4:51)

Well, I'd say two things. The first thing is that I think the macro view is the right way to look at it. Evergrande in and of itself is, you know, pretty important, pretty painful, but it's much more important as a symptom of what we've been seeing. The latest round of defaults in China didn't start with Evergrande. You could argue that they started in May 2019 with Baoshan Bank, and since then, we've had a series of very important defaults that have all been resolved by the regulators.