Two Important Changes To How We Think About China: Michael Pettis

Anyone who’s heavily invested in China has been on the lookout for signs of a hard landing for at least a couple years now, so it’s not surprising that a reduction in the minimum reserves that Chinese banks have to hold (from 20% to 19.5%) has gotten a lot of attention. But Michael Pettis, finance professor at Guanghua School of Management at Peking University in Beijing, points to 2012 comment from central bank governor Zhou Xiaochuan that the reserve requirement ratio (RRR) is a ‘foreign exchange sterilization tool,’ related to capital flows instead of monetary policy.

“Predicting what will happen in China over the next few months means predicting the outcomes of the resulting political and institutional conflicts,” Pettis writes...