Michael Pettis’ Misleading American Narrative on China

 

Michael Pettis has become the go-to source for getting most things about China's economy wrong. Pettis’s unconventional ideas and even more unorthodox career path have managed to short-circuit the traditional economics idea-to-policy pathway. Pettis was an emerging markets bond trader with two master’s degrees, international affairs and an MBA (both from Columbia University). He currently teaches MBA students at Peking University’s Guanghua School of Management and, for the most part, does not publish academic research. 

Pettis has likened himself to a 19^th-century pamphleteer, writing mass-market economics books and op-ed articles. What he also does is tweet. He is peer-reviewed by the Twitter peanut gallery – not credentialed economists. 

Where does Pettis fit into all of this? This eccentric thinker issues expositions by Twitter. He has unfortunately become the nexus of China economic thought in mainstream Western media.

For two decades, Pettis has told the Western world that China was overinvesting and under-consuming and that growth will collapse to 2-4%. But China grew two to three times as fast. 

Fundamentally, Pettis believes that America runs persistent trade deficits because Asia has implemented policies that incentivize production at the expense of consumption and is externalizing those imbalances onto the US, the “consumer of last resort.” His preferred set of policies would involve taxing capital flows, targeted tariffs and industrial subsidies that even out the playing field. 

On consumption, China grew household consumption twice as fast as second-place South Korea. And the US has increased household consumption faster than all major developed economies.

 

Graphic: Asia

The two most dangerous ideas put forward by Pettis are 1) China’s economy is wasteful, inefficient and on the cusp of stagnation, and 2) consumption creates value. Both ideas are not only wrong, but further from the truth. It is highly likely that belief in these two ideas misled the brain trust (or lack thereof) surrounding President Trump. 

Pettis has been trafficking in this fallacy for decades – the idea that consumption, especially US consumption, is a public service of some kind. This fallacy has high purchase in America because it appeals to what Americans have become – shoppers. It has also resulted in unfortunate economic formulations like “supply of demand.” As in the US economy is accomplishing great feats by supplying demand to needy Asian factory workers. As if supply and demand were not useful enough economic concepts, we now have supply of demand. 

This is all nonsense. There is no such thing as supply of demand. American consumers are not supplying their demand in exchange for Nikes from Vietnam. American demand has no value to the Vietnamese. American consumers are trading American assets for Nikes from Vietnam. 

Today, nottom of Form

Today, nine of the top 10 research universities (according to the Nature Index), are now in China, up from zero 25 years ago. Out of 64 technology verticals tracked by the Australian Strategic Policy Institute, China now leads in 57. Two decades ago, the US led in 60 out of 64 technologies. These trends are accelerating.

Graphic: Asia Times

60% of those who score in the 99^th percentile on the math portion of the SATs is Asian Americans who make up 5% of the population. 20-30% of Chinese high schoolers would likely score in the 99^th percentile on the US math SAT. When Chinese American families contemplate moving to China, the biggest hurdle is the fear that their children cannot keep up with local students – these are PhD families.    

All the tariffs, taxes on capital flows and industrial subsidies will amount to nothing if Americans do not fix their education system and lift their game. The Ivy League should not be 25% Asian. Silicon Valley should not be 50% Asian. Even Wall Street should not be 16% Asian.    

And no nation should be starting an economic war with delusional strategies like, “They need our consumers.” The first humiliations are already in with Trump caving on certain tariffs. The final American humiliation will be psychologically unbearable.  But the world will have suffered as well, and for what? Trumpian ideas have no basis in rational economic thought. So, Michael Pettis and Peter Navarro could lead the world into a recession if not a depression. 

Reference:

Michael Pettis misleading the American zeitgeist on China, Han Feizi, 14 April 2025