The Great Rebalancing
by Michael Pettis
Princeton University Press
China will be forced to make a drastic change to its development model that will result in average GDP growth of three per cent or less over 10 years. Its economy will have a long and bumpy landing.
That is Michael Pettis' dramatic prediction in his book, The Great Rebalancing: Trade, Conflict and the Perilous Road Ahead for the World Economy. The professor of finance and economics at Beijing University argues that China's change will be part of correcting major imbalances in the global economy that include the US consumption binge, surging debt in Europe, the stagnation in Japan and the commodity boom in Latin America. "It will be impossible to resolve any issue without forcing a resolution for all," he writes.
"China has already taken too long to address its domestic imbalances and is running out of time … rapidly rising debt means that, within four or five years, it will have no choice but to force through a rebalancing of its extreme under-consumptionist policies."
To achieve this, there must be a substantial transfer of assets from the state to the household sector and an absolute decline in state wealth, Pettis writes.
He sees drastic change too in Europe where the "peripheral countries" - including Spain, Portugal, Italy and Greece - will leave the euro. This will be painful "but postponing devaluation and debt restructuring will be more painful because … over the next few years businesses will disinvest, workers will become radicalised, savers will flee and the political structure will become less stable. The sooner the crisis is resolved, the less damage there will be to local economies and more quickly growth will return".
The US is rebalancing slowly and painfully from its high debt and excessively low savings, and will be the first major economy to emerge from the crisis, Pettis writes.
The enormous change in China will be positive for the world - its current account surplus will fall and the environmental degradation caused by its high growth will be reduced sharply.
But the change will be bad for the big commodity exporters such as Brazil, Australia and Peru, and drive down the price of metals and other non-food commodities. But it will be good for other commodity importers and exporters of food, as households increase their wealth and, as a result, their consumption of food.
This is a dense and well-argued book. It is most suitable for economists and other specialists, but possibly too complex for many general readers. It will be read with interest by the large and growing community that follows China's economy.