Earth to Earth: We Have a Problem

Michael Pettis knows economics – and more specifically, China economics – very, very well.

He’s the perfect blend of an East meets West economist, as although he’s currently a professor at Peking University’s Guanghua School of Management, specializing in Chinese financial markets, he worked on Wall Street as far back as 1987. Bear Stearns graces his resume (as a managing director), as does Columbia university, where he taught at the Graduate School of Business.

So when he says that China could very soon be going through a Great Depression with Chinese characteristics, it’s time to pop our heads up like gophers and listen.

You can do that in our most recent Cool Aid podcast. Or at least check out some of these important points from what could be a landmark lecture this past week at the Cheung Kong Graduate School of Business:

• Myth: China is wealthy because it has the highest reserves in the world. Reality:This is not wealth. You can’t use the reserves (in dollars) to pay for – say – new hospital staff. Converting to RMB won’t work, because the People’s Bank of China, would just end up buying the dollars back. That’s why the dollar reserves keep growing in China.
• Myth: China can’t have a crisis. Reality: China has a current accounts surplus. It has a capital account surplus on the private side. It has the largest reserves in the world. All three things were true about the U.S. in the 1920s, which underwent a domestic crisis in the 1930s.

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