Keep pulling the thread on Michael Pettis.
The current global trade imbalance is unsustainable and will inevitably lead to a period of "trade war" and trade contraction.
China has the highest savings rate and lowest consumption rate in the world, leading to a structural imbalance where domestic production exceeds the total of domestic investment and consumption.
Before 2007-2008, China's debt-to-GDP ratio remained stable despite rapid debt growth because investment was productive; after this period, the ratio began to rise as debt growth accelerated while GDP growth decelerated, indicating a shift to non-productive investment.
In response to the collapse of its current account surplus during the 2008 global financial crisis, Beijing engineered a massive increase in domestic investment, primarily directed towards infrastructure projects, to prevent an economic slowdown.
To counter the 2015 economic slowdown, Beijing stimulated another wave of investment by easing property market restrictions, including lowering mortgage rates and reducing minimum purchase requirements, which fueled the final stage of the property bubble.
Following the collapse of China's property sector bubble around 2022, investment was shifted almost dollar-for-dollar out of real estate and into manufacturing to prevent a drop in overall investment and GDP growth.
Overinvestment in specific Chinese manufacturing sectors led to a phenomenon called "involution" around April or May of the current year, where massive overcapacity forced companies to sell products, in some cases, below their variable costs.
Michael Pettis predicts that China will shift investment away from "involuted" sectors like EVs and into other areas like infrastructure and non-involuted manufacturing sectors, including petrochemicals, chemicals, steel, and automobiles, to maintain GDP growth.
Michael Pettis believes Europe is the region most at risk from the global economic shifts occurring between the United States and China.
The United States accounts for more than half of all global trade deficits, and together with Canada and the United Kingdom, these three countries account for nearly three-quarters of all global deficits.
Michael Pettis argues that the most effective way for the U.S. to resolve its trade deficit, short of a global customs union, is to restrict or tax capital inflows, as these inflows directly force the recipient country to run a corresponding trade deficit.
Many businesses in China operate under "soft budget constraints," where the state-controlled banking sector is instructed to provide necessary funding to cover their losses, allowing them to continue producing even when unprofitable.