A Chinese Soft-Landing Will Inevitably Lead To A "Very Brutal Hard Landing", Pettis Warns

Tyler Durden's picture

Excerpted from Goldman Sachs interview with Michael Pettis,

Allison Nathan: Given how daunting some of these challenges seem to be, is China heading for a hard landing?

Michael Pettis:

I think the soft landing/hard landing debate misrepresents the structure of Chinese growth.

China’s options are not a soft landing of 6-7% growth for the rest of the decade or a hard landing of growth below 5%.

The real choice is between either what I call a long landing, in which growth drops on average by roughly 100 to 150 bps per year, or a soft landing followed by a very hard landing.

The long landing scenario requires that the reforms be implemented reasonably quickly, because we may only have another three or four more years before we run out of debt capacity, but not disruptively. A long landing won’t be easy and it will require political skill at playing off the different interests, but it would be orderly. And while annual growth rates in this scenario wouldn’t average much above 3-4% during President Xi’s administration, rebalancing means household income growth would be higher, and so the decline in the income growth rate of ordinary Chinese wouldn’t be anywhere near the decline in overall GDP growth rate.

If, instead, we have what everyone would hail as a soft landing, with growth remaining above 6-7% for another two years, it would just mean that credit was still growing too quickly. And once we reach debt capacity constraints, the so-called soft landing would be followed by a very brutal hard landing.

*  *  *

An oldie but a goodie...

Various commentators have pointed to China’s cement industry as one indicator of a property bubble, noting that China has produced and used more cement in the last few years than the United States did over the entire 20th century. Data from US and Chinese government sources compiled by the historian Vaclav Smil – and publicized by the blog of Bill Gates – show that China consumed 6.6 billion tons of cement in 2011-2013, vs. 4.5 billion tons consumed by the United States from 1901-2000.

*  *  *

As Pettis concludes,

In China, it will be no different.


Growth miracles have always been the relatively easy part; it is the subsequent adjustment that has been the tough part.

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ebworthen's picture

The KleptoCronyCapitalistCommie empire is the home of all the off-shored U.S. careers and production.

It is the nest of the U.S. Pterodactyl Corporate empire of cheap shit sold on low margin.

So yes, there is no soft landing for China or the West.

markmotive's picture

Bad for commodity exporters. Good for US.

US expansion is still in early innings.


nuclearsquid's picture

Man, we can't even handle our crumbling infrastructure

  God help them in 50 years.

new game's picture

just fuckers, freashly poured concrete...

NotApplicable's picture

Do you seriously believe there's expansion occurring when the entire world has had demand pulled forward to the point that there's no future left to consume?

Play games with exponential functions all you want. However, the impossibility of escaping a credit-fueled crack-up boom/bust will not be denied. The bust can only be transferred to other sectors, in hopes that the banksters will avoid the blame.

Stimorolgum's picture

Very true Sum Ting Wong here

Bloppy's picture

The US media is SO behind the curve on this one, or doesn't want us to know about it at all.


Elsewhere: PC lefties turn against Bill Maher after his Islam comments, want him barred from UC commencement speech:


reader2010's picture

That's pure bullshit. In a Fascist country where the fascists I mean the communists control everything,  how tough to control supply and demand of credit. Adolf Hilter was put to shame by Deng Xiaoping. 

Zeta Reticuli's picture

It hasn't been a Communist country since 1978. When you have private property, free enterprise, private banking, etc it is no longer cammunist.

It is easier to start and run a business and get rich in China than it is in America. You are just spouting recycled 1956 Cold War propaganda. Your handlers must be proud.

teslaberry's picture

you must be one of those people who bleieve all communicsm must be pure communism and as such communism doesn't exist and never did. just like democracy and dictatorships never really existed because they're not pure. 


china has a one part system called the communist party. they make the decisions at the end of a gun barrel pointed at their people's heads. call that whatever the hell you want, but don't pretend the confetti money being thrown around is going to lead to a free POLITICAL SYSTEM. it won't. don't confuse my message by accusing me of saying the u.s. has a free political system either. 


china is dictatorship of people who always dress themselves up as the "communist party of china'. it matters not what kind of system you or anyone claims they have in a nominal sense. they are an autocratic dictatorship of overt single party membership. and they call themselves communist. 

keep in believing in your fairytales of science of political behavior. power is not a science but an art. entire societies are formed around the artform of controlling human beings. collective delusions might lead to the narrative of a system that exists , but collective philosophical delusions about what systems 'are' what-----are just nonsense. 


economics--not a science

political science ---not a science

philosophy----not a science


all is imprecise and at the very base level our collective actions resemble most closely the patterns discerned explicitly in primates. all the fancy nomenclature of the various social sciences is just lipstick on a pig....

AldousHuxley's picture

what's the difference between US political system versus Chinese communism?


1 extra name on the ballot.


That's all.

LULZBank's picture

Political System - Getting poor people to look upto rich people for governance, be it communism or capitalism or democracy.

Apostate2's picture

Private property? reread the PRC constitution.

Ness.'s picture

China got a case of the... Hong Kong Flu ~ The Ethiopians



Cognitive Dissonance's picture

I suspect China is not using, or has not used all that cement, copper, lumber and various other commodities, but is in fact stockpiling them because in a near failed fiat future the commodities will be considered hard assets.

Soul Glow's picture

It is wise to stockpile some commodities.  In other cases they may just end up rotting.  

Do they keep avacodos in a vault for the ETF?

CrazyCooter's picture

I may be mistaken (any cement experts?) but I believe the precursor to cement is in fact easily storable and represents the bulk of the energy investment requireed. That is to say you could create this stuff and dump it in a plastic lined pit, cover it with plastic and dirt, and dig it up in a decade or too and still use it to make actual cement with relatively little effort.

I will try to source and repost.

That said, they are in a huge property bubble and I can't imagine what the hell they want to build in ten years that they haven't already built. Maybe export it?



EDIT: I was thinking of clinker.


Seems to indicate only a few months with proper storage. I swear I read it was much more easily stored, but it looks like not!

SAT 800's picture

No one stores cement; or concrete, the engineering product; it was all used.

old naughty's picture

hence, the 65 million vacant houses, no?

Zeta Reticuli's picture

If you travel around China, you will see infrastructure construction on a level that is hard to believe. Housing, airports, highways, railroads, subway systems, parks, bridges and tunnels. Trust me, they are building.

Cognitive Dissonance's picture

There is no doubt they are building at an incredible pace. I said they were not using all of the commodities. If they put aside just 10% per year it would amount to a large stockpile very quickly.

Zeta Reticuli's picture

I know for a fact that they are stockpiling copper. There was a big scandal in my city (Qingdao) last month where somebody had forged some paperwork so that it sould be used as collateral for a loan  several times over.

China is also buying and mining gold on an epioc scale.

When QE ends and gold is sky high, they will be holding all the marbles.

Nage42's picture

Possibly why the US is ramping up the Colder War so that when the music stops playing for their Finanical Engineering facade, then they'll have the sheep all baying along for blood to go and get those "marbles," no?

Any number of excellent examples throughout history of when you are smarter than your neighboor and plan ahead for a rainy day that's all fine and good, but keep in mind that when stupid neighboor starts to suffer because of his stupidity... well... guess who he comes to first to "solve his problems?"


SAT 800's picture

they have stockpiled some copper; and zero lumber and concrete.

LostandFound's picture

Bingo! they are front running the collapse of the ponzi scheme. This is apparent in everything that China is purchasing at the minute, from real estate, commodities, gold, mines all around the world.

I saw a comment recently from a chinese banker who said, we cant believe the world is letting us print paper currency and buy real assets for them....

LULZBank's picture

What do you expect the World to say when they are doing the same shit themselves?

Everybody is in the scam, east, west, north, south, why stop a good thing going?

Paper for physical scam.

Soul Glow's picture

And now that someone (or something) has cornered the copper market....

himaroid's picture

Yanquis once knew how to salvage a bad landing.


AdvancingTime's picture

The debate continues as to how stable china really is. A big reason dropping house prices in China is so important is that is where almost 75% of household wealth is stored. Here in America a much larger share of household wealth, approximately 71% is stored in financial instruments. The end of the housing bubble in China has the potential to become a huge deflationary "house of cards." 

The country is already suffering from massive overcapacity. Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system. This money encouraged expansion and construction with little regard as to real demand or need.

For years the people of China have had the habit of saving much of what they earn but the low interest rates paid at banks has not rewarded savers. With few investment options much of this money has drifted towards housing and driven housing prices sky high. The economic efficiency of credit is beginning to collapse in China and the unwinding of China’s giant credit spree could be very painful. More in the article below.


SAT 800's picture

China is not even civilized; it's an utterly mad and completely ruthless dictatorship; everything is done on the basis of central comtrol and bribery. In 1960 when I got out of high school, the chinese were planted rice by hand wading around in their paddies, hoping they wouldn't starve that year. there's no particular reason they shouldn't be in exactly the same condition right now. globalization is code for "give all your dollars to China and then die". It's just that simple. We made China.

LULZBank's picture

China was another layer added to the US FED ponzi to make it last a while longer.

LULZBank's picture

American engineers made pyramids.

They gave the technique away and cannot make them any more.

barre-de-rire's picture



America is the only country that went from barbarism to decadence without knowing civilization.




Wild Theories's picture

wait what, GS interviewed Pettis?

why are we getting the excerpted GS interview when Pettis' blog, and the more complete view of his actual position, is right on the ZH reading list?


is GS an advertising contributor for ZH now?

CrazyCooter's picture

I keep my cash in a safe deposit box (and get down votes for bringing it up) ... so they must be selling something to someone else.

Funds I don't control are in money markets.

Fuck 'em. If I have to ride this fucking train to zero, I am doing it in style!



RagnarDanneskjold's picture

Speaking of hard landings, the northeast is where a lot of heavy industry is located and indutrial production plunged into recession in September. Real estate investment plunged 41% in Liaoning in September. The hard landing may already be unfolding.

Liaoning Sounds Warning on Chinese Economy


Consuelo's picture

Oh Fuck me...   Does anyone realize just HOW MANY TIMES this exact meme has been proffered by Pettis (and quite a few others) - since 2008...?   Has it gotten to the point where nobody remembers what any of these self-appointed 'experts' said or prognosticated such a short time ago - Repeatedly...?   Is it like just flapping your gums while people bow to your annointed expertise, and 6 months, 1 year, or 5 years later when none of it materializes, 'Oh well'...?

CrazyCooter's picture

Doesn't mean it won't eventually happen.

Personally, I am AMAZED this fucker (i.e. the economy/financial markets/etc) are still alive and kicking.



barre-de-rire's picture

technicaly, on a time scale big enough, when  you ear the world ends, in 4.5 billion years, when there will be no more sun, i think the sentence  turns to an affirmation, not a prophecy.


finance ? modern scam, always was, always will.

Bazza McKenzie's picture

Clearly you don't remember what Pettis actually said -- perhaps you never read it.

He has never made forecasts about imminent doom in China.  He has always pointed out that the then current rate of growth was unsustainable.  He didn't say that prior rate of growth was a bad thing, just that it could not go on at that rate forever, as has been the case with all other economies that have, for a period, grown very rapidly.

He has never forecast that China would become a basket case, just that within a decade there would be a very substantial slowing one way or another.  And clearly that slowing has been occuring over the last few years.  No one now talks about an 8-9% pa growth rate -- but at one time there was a widespread assumption it would continue while Pettis was pointing out it inevitably had to slow.

So contrary to your unsubstantiated assertions, some of what Pettis has previously forecast has already occured.


aquarian1's picture

I read a newspaper called the Northern Miner. Some time ago (2yrs?) there was an article in it that concluded China will have a very hard landing and it can't be avoided.

I wish I could remember the numbers but it might have been 1-2% GDP growth.

In the paper there are articles for the demand of various metals. Esstentially the demand for iron and copper have slowed dramatically and it is concluded the supercycle is over. China drop in demand is a large part of the slow down.




laomei's picture

lol, pettis... wrong over and over and over and over again, not as pathetic as chang, but pretty fucking close and closer every day.

Wild Theories's picture

Well, contrary to what what the kneejerk title of this article is trying to suggest, Pettis isn't cheerleading the china-bear side.

He's actually on the cautiously optimistic side of Chinese reforms.


To sum up his nuance, it's a long-landing vs short-landing scenario:  long landing good, short landing bad. "soft-landing" is a misnomer.

A 'soft landing' created by CB easing and govt stimulative measures to prop up the economy will be a short landing, short soft-landing=bad, because it's a head fake(just like the FED printed recovery).

A 'soft landing' created by gradually winding down the bubbles and excesses in the debt structure and allowing sectors of the economy to cool, slowly and over a longer period, would effectively be a long landing. long soft-landing=good, because it would actually be real.

he's against soft-landing by pump&ease(short term targets), he's for soft-landing by slow unwind(long term targets).


It's always better to read what someone writes originally than to read their interviews with x, y, and z.

fzrkid's picture

Unless an economy exports its products it doesnt really grow, right?? Consumption within an economy merely transfers $ from one hand to the other.


So if the rest of the world is bankrupt who are they going to export to?


In uhmarikah, the economy is 75% consumption and 25% production. The 25% of the producers can only support the consumption side for so long, hence the overwhelming debt loads on the economy.


It always baffeled me how the cheerleaders would say how GDP is expanding but yet that was based on consumption. I thought GDP is suposed to measure production... Consuming products made in foreign lands does not boost the consumption side economy, it literally trasnfers all the money to the producers.


Dollar Bill Hiccup's picture

More cement ... shoes ...

headhunt's picture

Using the logic of Congressman Hank Johnson; they may cause the world to tip over with all that concrete in one area of the world.