“Video: A TrendMacro conversation with Michael Pettis on whether China’s stimulus can get it out of the "value trap"

China’s recently announced stimulus plans, much of which remain vague, will not address fundamental rebalancing challenges in the hangover following an era of astonishing growth. A number of stimulus measures are targeted at getting stock prices higher, including loans for share repurchases – and the authorities won't tolerate a conspicuous failure – so equities are likely to move higher in the intermediate term. China’s growth model is similar to that of Japan, Germany and the USSR in decades past – force high savings rates to fund debt-fueled development of industrial infrastructure. But the very success of that model leads eventually to a dangerous rebalancing challenge, when the marginal investment project has negative net present value. The stimulus seems primarily designed to move China deeper into that dangerous territory by lowering interest rates, and do little to achieve the one thing that can stabilize the economy – increase the consumption share of output. Paradoxically, Chinese consumers save more and consume less when rates are lower. The consumption share of output is the lowest in the world, but it makes an outsized contribution to overall Chinese growth. So de-emphasizing it amounts to shrinking what works while enlarging what doesn’t.