I made a comment on Friday and now Pettis' second half is out so I would make a little more.
Firstly, are the two examples of painful adjustment that Pettis used, namely the US in the 1930s and Japan in the 1990s applicable to China at all? The 1930s was or was in the wake of the great depression world wide but particularly in the US following the stock market crash in 1929 and the 1990s for Japan were the first of Japan's two lost decades following the burst of its financial bubbles. Further, both countries at the respective times were at world economic frontier with one of the highest income in the world. Is China in those situations? No, any person with a common sense would understand China isn't. China is only probably about 20% of the per capita income of that of either the US or Japan. China may have some bubbles, but definitely not as severe as to hurt its real economy. There is plenty room for positive growth and the degree of uncertainties on its growth is not as high as those in the economic frontier given the room to further catch up. By any measure, China would not allow bubbles to burst to such a damage degree.
Secondly, as long as China's saving rate is high to sustain its investment and net export, there is no need to artificially to adjust its domestic consumption at a damaging speed. Its financial market and hosing market are unlikely to depress its economy, given its huge foreign reserves and high savings.
Thirdly, Pettis has a automatic adjustment factor, that is, the net export and government consumption. Contrary to Pettis assumption, this factor can accommodate a higher savings/low consumption and high investment if and when needed.
So, Pettis is wrong in his conclusion that China is facing a decade of 3-4% growth.
Further, Pettis got the cause effect wrong. The painful adjustments in the US in the 1930s and in Japan in the 1990s were the results of low economic growth. During the relevant periods, their investments fell and their consumptions didn't grow. It's not the adjustments that caused low growths. Rather, it's the low growth that caused painful adjustments.
China won't have that painful adjustment and as a result there won't be automatic low growth flowing from that painful adjustment. And if there is no low growth, there won't be painful adjustment in consumption and investment.
China's new leadership government has already stated that it will sustain reasonable growth in the process of economic adjustment. It seems its limit of low growth is likely to 7.5% and it is unlikely to allow growth below that for any long period.
The argument of a decade low growth of 3-4% for China is fanciful and delusional to the extreme.
All the scenarios Pettis listed in the table is real growth rate and no inflation is included. In all likelihood, inflation in China is likely to be between 3-4% a year on average for the next decade or so, as indicated by the current 3.6% target for a real GDP growth target of 7.5% for this year.
If inflation is included I would assume that China can maintain 8-9% real GDP growth that means nominal growth will be around 12-13% or more higher. For a nominal growth of 12% a year, according to the Pettis table (by extension, roughly 2% higher for all variables), the investment growth can be as high as 9-10.5% a year and consumption growth 16-18%.
Would be that healthy economically? I don't see a problem with that. Of course, there is no need to adjust between investment and saving/consumption as rapidly as Pettis argues and a longer adjustment, possibly 20 years or more is more likely given that consumption growth is that high and people would still have enough incentives to maintain high savings. Most people would be happy with that outcome.