'Act before reaching tipping point'

Michael Pettis says the Chinese economy could hit a wall within three years unless significant reforms are implemented. Wang Zhuangfei / For China Daily

Michael Pettis believes China's investment-fueled economic model is running out of time.

The professor of finance at Peking University's Guanghua School of Management argues that unless significant reforms are implemented the Chinese economy could hit a wall within three years.

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This could see GDP growth collapse from its current 7.6 percent and head toward zero.

"We have at least two or three more years of the (investment-led) growth without running into debt capacity constraints. We have to adjust before then," he says.

Pettis makes his arguments in his new book Avoiding the Fall: China's Economic Restructuring, which was selected as one of the top 10 economics books of 2013 by the Financial Times.

"The (current) model is over. Once you begin misallocating investment on a systematic basis it is time to switch to another growth model. History is not on China's side. No country has ever managed to switch in time. They have always waited too long to when debt levels move up to a very dangerous level."

Pettis was speaking in his office above XP, a Chinese independent music venue near Houhai Lake in Beijing, which he also owns and operates as a sideline to his day job.

The 55-year-old American, who grew up in Spain, says the worry for Chinese policymakers, who set out a comprehensive economic reform agenda at the Party's third plenum at the end of last year and at the National People's Congress and the Chinese People's Political Consultative Conference earlier this month, is that it is impossible to gauge when an economy has reached the critical point.

"Once you reach that point things degenerate so quickly there is not much you can do about it. So you never want to reach a point when you know you have too much debt because usually by then it is too late."

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