China Increasingly Relies on Nonproductive Investment for Growth

via Mike Shedlock

China’s reliance on nonproductive debt for growth has been obvious for years. But let’s go over why that is so.

1/5
Pekinology's very useful translation of Lan Xiaohuan on China's local government competition and overcapacity provides almost a definition of what the consequences are of a large and growing part of the Chinese economy operating…@ZichenWanghere t.co/m7SJkaaRP6

— Michael Pettis (@michaelxpettis) March 30, 2024

Embedded in the Way China Works

3/5
In fact it is more than just a "chronic problem". It's embedded in the way the economy works. As the economy must rely increasingly on non-productive investment to drive the activity needed to reach GDP growth targets, the economy reacts by shifting activity from those…

— Michael Pettis (@michaelxpettis) March 30, 2024

Erosion of Role of Bankruptcy Is Critical for Growth

5/5
the overall growth strategy, which requires a continuing shift away from hard budget constraints, and so a continuing shift to those sectors of the economy that are not subject to bankruptcy. Improving the bankruptcy process, in other words, is almost irrelevant.

— Michael Pettis (@michaelxpettis) March 30, 2024

This happens in the US too, but not the same degree or in the same ways.

For example, the Fed recently papered over US treasury note losses of banks by swapping them for dollars at par. But the Fed has not lifted a finger on commercial real estate losses.

The amusing thing is how many people believe the yuan or a BRICS-based currency (call it a BRICK) will replace the dollar as the world’s reserve currency when it meets zero conditions necessary.

What Would it Take for the “Brick” to Succeed?

1. The Brick would need to float freely. The yuan doesn’t.
2. A functioning Brick-based bond market.
3. A significant desire by individuals to trade in Bricks and accept Bricks rather than local currencies or the dollar.
4. Willingness of China to stop export mercantilism.
5. Trust

China meets none of the conditions. For discussion, please see What Would it Take for a BRIC-Based Currency to Succeed?

Meanwhile, China has an imploding property bubble, capital controls. a yuan that does not float, and is overly dependent on insolvent and corrupt State Owned Enterprises (SOEs) for growth. And China’s demographics are horrible.

Instead of supporting consumption, it has again turned to exports for growth. That strategy is not good for either China or the US. But here we are.