Michael Pettis: Alternative rock and Chinese finance

Economist Michael Pettis, one of the foremost authorities on China’s finances, grabs the mosquito spray and applies it generously on his legs. At this time of the afternoon and at this time of year on his Beijing patio, one can end up swarmed by mosquitoes. Pettis, 65, has been in China for 20 years, and he lives on a street just a stone’s throw away from the Forbidden City in what is known as a siheyuan, an ancient construction made up of several buildings built around a central open space. As the spectacular house is large, he shares it: the rooms on the north flank house the offices of the record label he set up years ago (although he later sold it); until recently, the south flank was used by a composer preparing an opera (he has now gone to seek inspiration in Thailand).

Pettis is not a typical economist, if such a thing exists. Dressed in shorts and flip-flops, the American rummages in the fridge for a couple of Tsingtao beers, the national brand, and sits with his legs up on the patio. The conversation starts with the latest news that is spreading like wildfire in Beijing’s political circles: apparently, at the recent meeting that the Communist Party high command holds every summer on Beidaihe beach, the president, Xi Jinping, was scolded by “the elders” for the country’s economic performance and his handling of relations with the United States. The scolding was so thorough that it caused him not to attend the G20 summit. That bombshell was published by the Asia Nikkei media (the Japanese, it is said, are among the best sources in the Chinese capital). Of course, this is almost impossible to verify; Chinese politics is practically inscrutable.

“Something is going on, that’s clear. But there’s no way of knowing whether the article is correct or not. In China we mostly guess about these things,” says Pettis, a professor of finance at Beijing’s Guanghua School of Business and a nonresident fellow at the Carnegie Endowment for International Peace. It’s been a summer of bad economic news for China, which has been unable to get the locomotive moving after lifting the pandemic lockdown: exports are falling, the real estate sector is in decline, domestic consumption is not taking off and youth unemployment has reached such high levels that in August the authorities decided to stop publishing the figures.

In any case, Pettis has been warning for years that Beijing’s economic model is exhausted. In all likelihood, the meteoric growth rates of the past will never be seen again, and China will grow at a rate below 5%. It will suffer an adjustment process similar to the one that dried up Japan’s economic success in the 1990s. Pettis adds that the idea that the Asian giant will overtake the United States at some point must be banished, he adds. For years, the economist swam against the current with such theories. The Chinese miracle was too dazzling to deny. But today he is joined by celebrated economists like Paul Krugman. “China’s economic problems go back to 2006, perhaps,″ Pettis says.

The economist has spent 20 years in China, giving him a lot to look back on. While teaching at the capital’s top universities, he founded two well-known rock clubs and started a record label. Pettis is passionate about indie music. He talks about the Asian giant’s lively scene in the early 2000s like someone remembering a golden age. “Beijing was the place to be, like Seattle in the 1990s.” The two stores closed. The decline of that vibrant scene is almost a metaphor for the golden years of openness to the world and unbridled growth that have been left behind.

During his formative years in New York, Pettis earned a master’s degree in development and an MBA at Columbia University before going to work on Wall Street. By that time, he had already founded a concert venue and another label. He rubbed shoulders with alternative rock bands like Sonic Youth (“they were fascinated by the Beijing music scene when they came”).

Pettis seems like a New Yorker. But he was born in Zaragoza, Spain, where his father went to live in the 1950s: he was a civil engineer and worked in the construction of the city’s airport, which was run by Americans. The family lived in different parts of the world, from Pakistan to Peru, but ended up settling in Torremolinos, Spain, to which intellectuals, hippies and foreign artists, along with the jet set, had flocked. His French mother founded an international school in Benalmádena, which is still functioning today. She and two of his siblings still live there. That reminds him of the time he visited Spain before the big brick landslide in 2008. He attended a big celebration with dozens of people. “They were all in real estate.” Something similar is happening in China. It’s part of the coming readjustment.

Being with Pettis means constantly talking about imbalances, the core of the economy. His conversation sometimes becomes complex, abstract, and he does not offer answers to the everyday trifles of journalists. He also asks that the interview not be recorded and notes not be taken so that he can express himself more freely.

As the patio grows dark, Pettis explains that China has relied on a heavy stream of loans and money in real estate and infrastructure for growth for decades. There was a lot to build in a country that was starting from the bottom up. But such investments are now becoming superfluous and therefore unproductive. Beijing has only one option left: raising the level of consumption. He believes that the formula is to get households to save less (savings rates are very high in China, to compensate for the lack of a public social safety net). That would make more money available and boost demand. But it is not easy to achieve. Pettis predicts tough political battles ahead.

That’s at the domestic level. Internationally, as global relations are shaped by the rivalry between China and the United States, Pettis goes back to 1944 and Bretton Woods to recall the famous economist John Maynard Keynes’s key lesson: “You cannot live in a global economy with constant imbalances, hence, the world’s protectionist movements. The system should be reformed,” Pettis concludes.

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