Alicia Garcia Herrero writing in a recently published Financial and Economic Review from the Magyar Nemzeti Bank (Hungarian Central Bank) addresses perhaps most important economic question of our age.
Will China run out of puff, Japan style; or not?
There are worrying parallels: both economies suffer from low private consumption, high savings and ‘significant economic imbalances’ [Debt, mostly]. A drop in total factor productivity, an ageing workforce and a multi-year-troubled real-estate sector complete the picture.
But there also important differences: China is still a developing economy, it’s a stronger geopolitical force than Japan ever was and this gives it considerable heft to shape its destiny, especially among the Global South.
This chart neatly sums up why most are now worried. The numbers differ but the patterns are similar.
China’s savings conundrum is worth highlighting as nobody in the world has a situation like theirs.
Part of Japan’s problems were a too-little-too-late attempt by authorities to burst the then bubble. It worked but by leaving it so long the effects were much longer lasting than anticipated. China hasn’t allowed the same mistake, especially as far as its property market is concerned, where the correction has been more rapid than Japan’s was.
Back to the ‘imbalances’. The debt trajectory similarities are also manifest.
The paper concludes pointing out we’re in the land of ‘Don’t Knows’ on this issue.
The fact that China’s planners have a template of things-not-to-do from Japan is important. The fact they also have more latitude with their economy as it’s at a different phase of development than Japan’s was when it went Phut! is also a plus; and that savings glut is an easy target for reform.
On the other hand, China like Japan may not for social, political and cultural reasons progress the changes that need to be made to grease the wheels from this point.
I’d like to add my two pennyworth here. I lived in Japan in the ’80s, which doesn’t make me an expert, but I witnessed first hand the excess, braggadocio, absence of introspection and irresponsibility that characterized the bubble which led directly to Japan’s comeuppance.
Now I live in China and the two are in no way similar. China, despite it’s achievements in the last 40-years, remains circumspect, vigorous, nervous, and usefully Andy-Grove-paranoid. Japan plateaued because it could afford to; for China’s leaders, failure isn’t an option.
You can review the paper in full via the following link How Close Is China’s Medium-Term Outlook to That of Japan?
Happy Sunday.