I get a lot of emails and phone calls asking me what I think is the likelihood of a sharp financial “adjustment” in China, and what the impacts are likely to be.
The first point to make is that it is a safe bet that China will experience financial instability, and not necessarily because of anything endearingly Chinese.Given the experiences of other countries, and given the state of the Chinese financial system, the argument that it will suffer from a crisis is very, very plausible, and not worth, in my opinion, betting against.
The obvious “generic” arguments are the easiest to set out.No large country that I know of (and probably no small one, either) has ever been able to combine rapid growth and social transformation without periodic financial crises.In fact offhand I cannot think of any country that has a functioning financial system and that hasn’t suffered periodic financial crises.In the 19th Century, for example, the US seemed to be hit by a serious panic every ten to fifteen years, on average, and it suffered at least two or three financial crises during this period that were devastating.During its own history China has suffered financial crises or panics, most recently in 1993-94 and 1997-98, but also throughout the 20th century and of course earlier (there is a fascinating story to be told about the relationship between China’s great remonetization in the late Ming and early Qing periods and the plundering of silver from the Americas)..
Against this, many China scholars argue that China today is sui generis – so different from everyone else that it can’t be judged by laws or experiences that have worked elsewhere.The only reasonable response I can give to such an argument is that I have never worked in a country (the US, France, Brazil, Mexico, Peru, Spain, Haiti, Pakistan, Argentina, to name a few) that wasn’t at least as sui generis, nor have I ever worked in a country whose own specialists hadn’t also assured me at least a few times that because of their unique histories and circumstances these countries were too different to bear easy comparison with the rest of the world.. As silly as this sort of provincialism may seem to many, it has been a powerful undercurrent in the thinking of many China specialists – foreign as well as Chinese.
If China is indeed “different”, it is different in ways that don’t give me much confidence in the safety of its financial system.Its banking system is filled with current and future bad loans; its bank managers are among the least experienced in the world in risk management and credit allocation; it has almost no financing alternatives to the banks; government credibility tends to be very brittle in China; and the national balance sheet is much weaker than that of many other countries that subsequently experienced crises.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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January, 2008
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