Michael Pettis at China Financial Markets says, “China’s growth is running out of Steam.” Blackrock brushes off concern.

On October 20, Blackrock global chief investment strategist, Richard Turnill, explained What cooling growth in China means for investors.

“We see China’s growth rate slowing only to still-solid and more sustainable levels. The implications for investors? Growth in China should remain supportive of emerging market (EM) assets and risk assets in general.”

Michael Pettis

Michael Pettis at China Financial Markets says “China’s Growth Miracle Has Run Out of Steam”.

Pettis’ viewpoint first appeared on the Financial Times. I asked Pettis permission to reprint and received an OK.

What follows is a guest post by Pettis, until the end where I add a few comments of my own on assessing the risk.

China’s Growth Miracle Has Run Out of Steam by Michael Pettis

China’s 19th Communist party congress ended last month with an indication that Xi Jinping’s new administration plans to rein in debt by abandoning the country’s long-term economic targets and allowing gross domestic product growth to fall.

Typically, analysts assume that changes in reported GDP reflect movements in living standards and productive capacity. In China, however, this is not the case. Local governments are expected to boost spending by whatever amount is needed to meet the country’s targets, whether or not it is productive.

GDP growth is not the same as economic growth. Consider two factories that cost the same to build and operate. If the first factory produces useful goods, and the second produces unwanted ones that pile up as inventory, only the first boosts the underlying economy. Both factories, however, will increase GDP in exactly the same way.

Most economies, however, have two mechanisms that force GDP data to conform to underlying economic performance. First, hard budget constraints, which set spending limits, drive companies that systematically waste investment out of business before they can substantially distort the economy.