Michael Pettis on China’s overinvestment paradox, and the Japan-style reckoning still to come

China’s advanced infrastructure and manufacturing prowess, and its ballooning debt, are not competing narratives but two sides of the same story, says celebrated China expert Michael Pettis.

Drawing a direct parallel with Japan in the 1980s, Pettis, who is nonresident senior fellow at the Carnegie Endowment, argues China is following the same investment-led growth model to its logical and difficult conclusion, which is one that will eventually force an economic rebalancing toward consumption.

“It took five years before consumption started to rise [in Japan]. In other words, consumption continued to decline from 1986 to 1991, and then it took 17 years for Japan to raise the consumption share of GDP by 10 percentage points,” he says, adding that China could see an even more drawn-out process with real costs to manufacturing competitiveness and national employment along the way.

In conversation with Top1000funds.com Asia Pacific correspondent Darcy Song, Pettis unpacks what all this means for institutional investors weighing China exposure over multi-decade horizons, and why he is bearish on the country’s economic outlook.