Is china repeating japan’s Missteps?
Beijing may seem dynamic, but it’s heading down a path we have seen before. China and Japan may seem to inhabit alternative economic universes. After more than two decaeds of stagnation, Japan is a fading global power that can’t seem to revive its fortunes no matter what unorthodox gimmicks it tries. By contrast, China’s ascent to superpower status appears relentless as it gains wealth, technology, and ambition.
Yet these Asian neighbors have a lot in common, and that doesn’t bode well for China’s economic future. The sad case of Japan shoud serve as a cautionary tale for china’s policymakers. Beijing pursued almost identical economic policies to Tokyo’s to generate its rapid development. Now China’s leaders are repeating the missteps the japanese made that tanked Japan’s economy and thwarted its revival.
Just like Japan, we believe China will eventually face a period of much slower growth, Goldman Sachs investment strategists said in a report earlier tis year. Analysts at rating s agency moody’s, writing in May, warned that china could suffer “a prolonged period of sub-optimal economic growth and persistent deflationary pressures, or possibly even economic stagnation.” James chanos, founder of fund manager kynikos Associates, has comapred china’s trajectroy to japan’s on steroids.
Some may disregard these warnings as the same predictions of doom that china has shrugged off time and again. but recall that 30 years ago, few foresaw the decline of japan, either. Japan was the East Asian giant poised to overtake the U.S. as the world’s top economy. Driving that ascent was an economic system that many considered superior to laissez-faire American capitalism. By fostering close, cooperative ties among the state, big corporateions, and banks, Japan’s policymakers encouraged investment and guided a national industrial strategy. Bureaucrats in Tokyo interfered with markets to a degree unthinkable in the U.S. by protecting nascent industries and directing financing to favored sectors and companies. Backed by such suppot, Japanese companies burst onto the world stage and pushed their American competitors to the wall.
But even as japan appeared destined for greatness, its ecnomoy was, in reality, starting to rot. Those clubby ties among finance, business, and governemnt misallocated capital and led to wasteful investments. Growth was given a boost by cheap credit in the second half of the 1980s, but that also helped inflate debt levels and stock and property prices. When this bubble economy burst in the early 1990s, the financial industry was flattened. japan has yet to fully recover.
China could be hurtling down a similar path. The methods Beijing employed to generate rapid growth – drirecting finance, nurturing tageted industires, and promoting exports – are replicas of Japn’s. And since the state in China’s state capitalism plays an even larger economic role than Japan’s offcious bureaucracy does, the Chinese government interferes with markets to a greater degree.
In china, the chummy government-business-banking triumvirate has led to excess steel mills, cement plants, and apartment blocks on a staggering scale. And Beijing’s policymakers have responded to overbulding with a massive influx of easy cash to keep the old, sputtering growth engines spinning. The flood of yuan has fueled unstable spikes in asset prices, as it did in Japan. last year stock markets in china escalated to nosebleed levels, only to deflatein a panicked crash. Now property prces in Shanghai, Shenzhen, and other major cities are rising so quickly that officials have stepped in to control them.
Bubble-prone, debt-obsessed economies are likely to fail, no matter the circumstances.
Perhaps more dangerously, China’s loose money has also pumped up a mammoth increase in debt- like Japn’s in the 1980s. Rating company Fitch show that total debt relative to national output in Japan jumped almost 80 percentage points, to 275 percent from 1980 to 1989, on the eve of the country’s financial meltdown, The same ration in China has risen steeply – more than 100 percentage points from 2007 to 2015, reaching 255 percent of its gross domestic product, according to the Bank for International Settlements.