Michael Pettis
@michaelpettis.bsky.social
Senior Fellow at Carnegie China. For speaking engagements, please write to chinfinpettis@yahoo.com
Michael Pettis is an American professor of finance at Guanghua School of Management at Peking University in Beijing and a nonresident senior fellow at the Carnegie Endowment for International Peace. He was founder and co-owner of punk-rock nightclub D22 in Beijing, which closed in January 2012. .. more
Economics
76%
Political science
11%
14/14
The reason Krugman sees this so clearly is probably because he wrote about the same process occurring in previous cases in other countries, most notoriously Japan. China's problem, in other words, is something we should (but too often don't) understand quite well.
The reason Krugman sees this so clearly is probably because he wrote about the same process occurring in previous cases in other countries, most notoriously Japan. China's problem, in other words, is something we should (but too often don't) understand quite well.
13/14
The main point is that bad investment isn't a recent problem. It's been a problem for over 15 years, one increasingly recognized by Beijing. It is precisely its recent attempt to reign in excess investment that explains why trade surpluses had to surge. One substitutes for the other.
The main point is that bad investment isn't a recent problem. It's been a problem for over 15 years, one increasingly recognized by Beijing. It is precisely its recent attempt to reign in excess investment that explains why trade surpluses had to surge. One substitutes for the other.
12/14
Even as most of China's debt continued to be directed into investment, its debt burden was roughly flat until around 2006-07, after which it began to rise quickly, with steep (and easy to explain) surges in the early 2010s, the late-2010s, and since the COVID pandemic.
Even as most of China's debt continued to be directed into investment, its debt burden was roughly flat until around 2006-07, after which it began to rise quickly, with steep (and easy to explain) surges in the early 2010s, the late-2010s, and since the COVID pandemic.
11/14
That's why my only quibble with Krugman is the extent to which "investment in China is running into diminishing returns in the face of slowing technological progress and a shrinking working-age population" implies that this has only become the case in the recent past.
That's why my only quibble with Krugman is the extent to which "investment in China is running into diminishing returns in the face of slowing technological progress and a shrinking working-age population" implies that this has only become the case in the recent past.
10/14
But as the growth in the productivity of total investment dropped to below the debt servicing cost, the debt burden started to rise, slowly at first, but by the middle of the 2010s it was growing at among the fastest rates in history.
But as the growth in the productivity of total investment dropped to below the debt servicing cost, the debt burden started to rise, slowly at first, but by the middle of the 2010s it was growing at among the fastest rates in history.
9/14
This means that throughout this period, debt grew quickly. But because nearly all debt was directed into investment, when the investment was productive, rapid growth in debt did not lead to rapid growth in the country's debt burden, e.g. its debt-to-GDP ratio.
This means that throughout this period, debt grew quickly. But because nearly all debt was directed into investment, when the investment was productive, rapid growth in debt did not lead to rapid growth in the country's debt burden, e.g. its debt-to-GDP ratio.
8/14
If investment continues growing faster than GDP, however, a rising share of that investment becomes excessive, no longer delivering as much productivity growth as it costs.
Throughout this period investment was mostly funded by debt.
If investment continues growing faster than GDP, however, a rising share of that investment becomes excessive, no longer delivering as much productivity growth as it costs.
Throughout this period investment was mostly funded by debt.
7/14
But investment growth rates that are much higher than GDP growth mean that the underinvestment gap narrows quickly. Once it closes, extremely high investment growth rates are no longer optimal. In that case investment should grow broadly in line with domestic demand.
But investment growth rates that are much higher than GDP growth mean that the underinvestment gap narrows quickly. Once it closes, extremely high investment growth rates are no longer optimal. In that case investment should grow broadly in line with domestic demand.
6/14
He is right, and this is a problem that has affected many other countries in a similar situation. China implemented a high-saving/high-investment development model that was extremely appropriate when its economy was severely underinvested relative to its absorption capacity.
He is right, and this is a problem that has affected many other countries in a similar situation. China implemented a high-saving/high-investment development model that was extremely appropriate when its economy was severely underinvested relative to its absorption capacity.
5/14
demand in the rest of the world as a safety valve to keep Chinese workers employed. Otherwise, without the massive trade surplus, the Chinese economy would fall into a deep slump given its insufficient consumer demand."
demand in the rest of the world as a safety valve to keep Chinese workers employed. Otherwise, without the massive trade surplus, the Chinese economy would fall into a deep slump given its insufficient consumer demand."
3/14
progress and a shrinking working-age population. Yet the Chinese government keeps failing to take effective steps to reduce savings and increase consumer demand. Instead, China is in effect exporting its excess savings via its massive trade surplus. It is using consumer...
progress and a shrinking working-age population. Yet the Chinese government keeps failing to take effective steps to reduce savings and increase consumer demand. Instead, China is in effect exporting its excess savings via its massive trade surplus. It is using consumer...
2/14
He notes: "In the past, China achieved stunning economic growth in part through a combination of very high savings and very high investment. Its savings remain very high, but investment in China is running into diminishing returns in the face of slowing technological...
He notes: "In the past, China achieved stunning economic growth in part through a combination of very high savings and very high investment. Its savings remain very high, but investment in China is running into diminishing returns in the face of slowing technological...
China’s Trade Surplus, Part II
How the surplus is achieved, and why it’s a problem
open.substack.com
1/14
Unfortunately I don't subscribe to Krugman's substack, so I cannot comment on the whole article, but I can say that the first few paragraphs lay out the issue very accurately and with commendable simplicity. He certainly understands the main issues.
open.substack.com/pub/paulkrug...
Unfortunately I don't subscribe to Krugman's substack, so I cannot comment on the whole article, but I can say that the first few paragraphs lay out the issue very accurately and with commendable simplicity. He certainly understands the main issues.
open.substack.com/pub/paulkrug...
China’s Residential Land Sales Revenue Slumps 65% From Peak as State Backers Retreat
Local government financing vehicles are left struggling with large land inventories and tightening cash flows
www.caixinglobal.com
Caixin: "China’s revenue from residential land sales fell about 65% in 2025 from its 2020 peak. The slump highlights the deepening fiscal strain on regional authorities, who have traditionally relied on selling land to fund infrastructure and service debt."
www.caixinglobal.com/2026-01-06/c...
www.caixinglobal.com/2026-01-06/c...
For my friends in Beijing, this Tuesdays' performance will be especially interesting. Not only are Li Jianhong and Yang Haisong performing, but the show will start with a young new trio whose first performance three months ago blew us all away.
www.yicaiglobal.com
Yicai: "China's high-speed railroad network, which is the largest in the world, will expand by about 10,000 kilometers over the next five years to 60,000 km."
www.yicaiglobal.com/news/china-t...
www.yicaiglobal.com/news/china-t...
3/3
in its external accounts to slow or even reverse the decline in its share, other major manufacturers who don't intervene in their external accounts must balance the combined actions of China and the US by reducing their shares of global manufacturing.
in its external accounts to slow or even reverse the decline in its share, other major manufacturers who don't intervene in their external accounts must balance the combined actions of China and the US by reducing their shares of global manufacturing.
2/3
This is just how arithmetic works. If the world's largest manufacturer (China) intervenes in its external accounts to increase its share of global manufacturing, and the world's second-largest manufacturer (the US) intervenes...
This is just how arithmetic works. If the world's largest manufacturer (China) intervenes in its external accounts to increase its share of global manufacturing, and the world's second-largest manufacturer (the US) intervenes...
German exporters face prolonged slump in key U.S., China markets
German exporters should prepare for continued weakness in 2026 in their two largest markets, the United States and China, with little prospect of recovery, the BGA trade association said on Friday.
www.reuters.com
1/3
Reuters: "German exporters should prepare for continued weakness in 2026 in their two largest markets, the United States and China, with little prospect of recovery."
www.reuters.com/world/china/...
Reuters: "German exporters should prepare for continued weakness in 2026 in their two largest markets, the United States and China, with little prospect of recovery."
www.reuters.com/world/china/...
3/3
The point is that any economy that takes steps to limit domestic consumption, including of imported consumer goods, will tend to raise exports relative to imports. Comparative advantage, on the contrary, is expressed only in balanced trade.
The point is that any economy that takes steps to limit domestic consumption, including of imported consumer goods, will tend to raise exports relative to imports. Comparative advantage, on the contrary, is expressed only in balanced trade.
2/3
The fact that academic economists continue to insist that trade surpluses are simply an expression of comparative advantage shows not only how little they understand comparative advantage, but also how little they know about the world outside.
The fact that academic economists continue to insist that trade surpluses are simply an expression of comparative advantage shows not only how little they understand comparative advantage, but also how little they know about the world outside.