People often tell me that the many predictions over the years of a sharp adjustment caused by excess money growth in China and have never come true, so why should we think they are likely to come true now? Actually I think China has in fact gone through some sharp financial adjustments, most importantly in the very difficult 1993-95 period, which we fail to notice in part because China had no financial system to speak of (it was still largely an arm of the MoF) and in part because China was still too small and isolated to have much of an impact on the rest of the world.But the reason for concern now is that the real monetary expansion has been quite recent.If you look at a graph of central bank liabilities to banks and bondholders, you can see that the real growth only started to occur at the very end of 2003.
Before then total liabilities to banks and bondholders hovered just under RMB 2 trillion for two years, before suddenly shooting up to around RMB 4.5 trillion by the end of 2004, RMB 6 trillion by the end of 2005, just under RMB 8 trillion by the end of 2007, and roughly RMB 9.5 trillion today.This nearly five-fold increase in less than four years is what should be generating concern today.
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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December, 2007
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