Few have followed the Dragon trail as closely as he has. A leading economist, former merchant banker, and Professor Finance, Peking University’s Guanghua School of Management, Michael Pettis has mastered the Chinese market moves well. Currently Senior Associate at Carnegie Endowment for International Peace, Washington, DC, Pettis warns that if the Chinese government begins to weaken the Yuan against the Dollar to boost exports, it might well start a trade war in an excellent way. Sarika Malhotra tries to understand the nuances of the export-laden Chindia scenario.
•Exports have been the worst hit now ? worst in the last 14 years for India, how much of a loss does it spell out for India and China?
The whole Chinese growth model has depended on domestic production growing faster than domestic consumption, with the balance being exported, mostly to the US. But with the necessary rebuilding of shattered US household balance sheets, for at least the next few years the US trade deficit will contract sharply, leaving China with a very large overcapacity problem that will take many years, even a decade, to resolve.
•What will be the long term ramifications of the same for India and China?
As India is far less dependent on the export market and relies more on domestic consumption it will emerge from this much faster than China. It may seem counterintuitive to some, but this crisis is going to be a long-term crisis primarily for high-savings, trade surplus countries. Just look at what happened to the US in the1930s.
•Given that India and China have the biggest domestic market do you think that the domestic market can compensate for the export market loss in India and China?
I don?t know about India but the process will be brutally difficult in China. They have been trying to grow the domestic market for nearly a decade but the development model has meant that consumption growth significantly lagged GDP growth. This was fine when the US was able to absorb the excess capacity, but it is not clear how they will react to a sharp rise in US savings.
•Do you think stimulus packages, government spending are only stopgap arrangements to deal with the situation?
In China I would argue that they are actually making the adjustment more difficult. They continue to focus on boosting consumption by boosting production, which actually exacerbates the overcapacity problem, and by virtually guaranteeing a future banking problem with non-performing loans, they will make it very difficult for consumption to grow as they appropriate savings to recapitalise the banks.
•What can be the long term measures to combat the same?
All things that hurt in the short term. Revalue the currency, raise the minimum wage, liberalise the banking system and interest rates. These are ways to boost net consumption in the medium term, but they will boost unemployment in the short term.
•Given the downturn do you think it is the right time to explore newer markets for exports and which potential markets can be targeted?
No. The world has to get used to the idea that the export-led model has outlived its usefulness. The days of rapid US GDP growth and a surge in the US trade deficit from 1% of GDP to 7% of GDP (with a smaller concomitant surge in certain other western countries) are gone for a very long time.
•Chinese exports are also suffering from trade disputes in the international market. Charges on dumping, subsidy are putting exports in an unfavourable condition. What can be done to remove trade barriers and facilitate the process?
It will require great statesmanship from all the major countries, which of course leaves me pessimistic. The historical precedents are pretty gloomy and I have been arguing for two years that we will see an acceleration in trade friction over the next three or four years. I don?t see how we can avoid it.
•What is the equation between quality and prices that has led to a decline in exports, given that Chinese goods are often targeted as being low on price and quality as well?
I think this is less important than many people think. The reason Chinese export have declined more slowly that those of other countries have to do with policies aimed at making Chinese exports more competitive.