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

So, you know, you've been a long time resident in China.

What are the biggest misconceptions foreign investors may have about China's economy and financial markets in your view?

You know, I think there are a number of misperceptions.

One is the centrality of political power.

There's sort of this belief that China is heavily centralized and heavily controlled by Beijing.

But in reality, there is a pretty significant dispersal of power, particularly among local governments, local provinces, local municipalities.

And this is a very old story in China.

Throughout history, one Chinese historian told me, you can recount Chinese history as coming in two flavors.

One flavor is there's total centrality.

The capital rules everything.

And the other flavor is that the capital has very little power over the localities.

And I would say in China, of course, we're much closer to the capital having a great deal of power.

But there is this perception that local governments do whatever the central government wants and the way it wants it to happen.

And that's not true.

And that's becoming an increasing problem as we're seeing growth disparities among various regions.

The other misconception, I think, is that...

When people look at China's infrastructure, there's sort of two stories going around about China, and they seem to be opposite stories.

One story is that China is massively overinvesting.

Debt is rising incredibly quickly.

It's basically bankrupting itself in the process of developing this manufacturing strength.

The other story is, no, things are going really well in China.

It's got the best infrastructure in the world.

It's got spectacular technology.

It's got really high-quality products that it's making and selling to the rest of the world.

And I would say it's important to understand that those are not two separate contradictory stories.