If a ‘great rebalancing’ is coming, will China really have to pay for it?

Michael Pettis has spent more than a decade warning that global trade imbalances will eventually have to unwind. His latest Foreign Affairs article again asks who will bear the cost of that adjustment, and argues that China may be most exposed.

The commentary accepts Pettis’s central view that today’s imbalances cannot last indefinitely. China, Germany and other economies sell much more than they buy, while the United States runs a large external deficit. Pettis links persistent deficits in rich economies to either rising unemployment, growing debt, or both.

His argument draws on earlier episodes involving oil revenues in Latin America, East Asia’s 1997 crisis and southern Europe after 2008. In each case, the imbalance eventually ended, and the adjustment brought pain. The commentary says China could face a similar turn.

Pettis also argues that power determines who pays during a crisis. Countries with weak borrowing capacity, vulnerable currencies or limited ability to control capital flows tend to bear the burden. He considers the United States better placed to avoid an approaching crisis than China.

The commentary questions why Pettis applies that power-based argument more forcefully to Beijing than to Washington. It points to an IMF estimate that China’s current-account surplus will equal 3.3% of GDP in 2025. December retail sales grew by just 0.9%, the weakest pace since late 2022, while household consumption accounts for about 40% of GDP.