President Donald Trump should relax about China’s plan to dominate the high-tech industries of the future.
That’s the view of Michael Pettis, a professor of finance at the Guanghua School of Management at Peking University in Beijing. The world’s second biggest economy won’t steal America’s lunch because it lacks the ability to innovate and has challenges so daunting that the real issue in coming years will be holding itself together, he said in an interview.
Those problems are a huge and rising debt burden; ugly demographics, with a rapidly aging society leading to a shrinking workforce; huge income disparities; and a chronic lack of innovation due to its rigid, controlled society, says Pettis, the former head of emerging markets at Bear Stearns Cos.
"The fear of China is a form of paranoia," he said . "I tell my friends in Washington: ‘Yes, step up the pressure a bit but China is not the great existential threat that you think it is.’ China’s not going to become the dominant superpower of the 21st century."
Pettis estimates China’s share of global output will shrink to 10 percent and perhaps lower in 20 years from about 15 percent now, as the burden of its rising debt drags on growth. Expansion is extremely unlikely to be more than 3 percent annually now and is overstated in official data, he says.
To make matters worse, Pettis believes that globalization of the world economy, which helped propel China’s turbo-charged expansion in recent decades, is over.
Here are excerpts from a recent interview:
Should the U.S. fear China’s plan to dominate future industries?
This is not a country we can expect major innovations from. In the west we don’t have enough confidence about this. How many governments in the world have decided they’re going to become major innovation centers? None of them have succeeded.
It’s really hard to figure out how to get a culture of innovation and I suspect it doesn’t have to do with political will. The types of reforms you need to become a great innovation center are pretty scary for a country like China. If you’re running things in Beijing, do you really want to have that kind of country?
I have this problem with my students all the time. These are the smartest kids in China and I cannot get them to depart from the beaten track of rote learning. They think if they just study a little harder they can do it. I tell them, "No, study less, think more." It’s really, really hard. There isn’t that culture here.
Why do you believe globalization is over?
The way we have generated growth is by lowering wages. That’s what everybody is doing. But the problem is that this cuts overall demand because wages drive consumption, and lower wages means lower demand.
Every country has the same policy: reduce your contribution to global demand and get a bigger share of what’s left, which is basically beggar thy neighbor. We’re all doing it. Either things get worse and worse and worse or we have a new Bretton Woods where we all agree to stop cheating, which is very unlikely, or we all start imposing tariffs and more importantly, restrictions on capital flows.
So what’s the outlook for China’s economy?
If you look at China and other countries that followed similar models, the main difference is that the imbalances in China are greater than we’ve ever seen before - debt is higher than we’ve ever seen before, and the growth in that debt is the fastest we’ve ever seen.
Look at the historical track record: for every country that has had an investment growth miracle, during the adjustment period that followed, their share of global output declined significantly. Japan is the classic example. At its peak in the early ’90s it was 17 percent of the world. Today it’s around 6 or 7 percent.
If China really starts addressing its problems in the next year or two it’s still going to have a terrible adjustment. Right now China’s 15 percent of world output. Twenty years from now if China is 15 percent of the world that would be pretty impressive. I think they’ll be down to 10 percent or maybe even lower.
The problems that it has are so severe that the real issue for China is if it can hold itself together once growth rates start to slow dramatically.