This is well written argument, but there is one big difference between China now and Japan then.
China is still going through urbanization in unprecedented scale. About half of the Chinese live in cities now. By 2030, cities will be home to 70 per cent of China’s population and generate 75 per cent of its GDP. There will be 200 million Chinese moving into cities in next few decades. China can be close to where Japan is now in the 2040 banking crisis. For now, even massive crisis just delays the inevitable increase in demand that eats away all mistakes in fiscal and monetary policy.
This is a superb article but it's scary how many of the points made apply directly to the US economy as well: zombie banks, real estate bubbles, a declining currency, faith in the bureaucrats and so on.
I think the underlying mechanism here is a centralized banking system in all three countries. Without getting into the religious discussion of whether a central bank is "right or "wrong", I would suggest that any system that relies on a small group of unelected humans making decisions on the supply of the underlying medium of exchange is imperfect and prone to favoring one group over another for reasons that are not positive for everyone.
Fed's decade long easy money policy had a vitalizing effect on many businesses in many countries...Soon unfortunately we may get a zombie attack all over the world.
I believe the unstated goal of US monetary policy 2009-2013 was to fix the balance sheets of overlevereaged financial institutions by making borrowing very cheap. I think that policy goal is hidden and the cost to our economy is unknown.
I don't really see any mention of demographics in the article. The "boomer" swell explains a lot in all three of these economies (US, Japan, China). The US was just about 13 years behind Japan in terms of the peak of the boomers hitting their mid 40s (maximum earnings and spending). The Japanese hit stall and decline in the early 90s, and the USA did pretty much the same thing on cue in the early 2000s. China's demographic decline is going to be especially sharp.
There is no need for a zombie China. Japan became a zombie due to terrible monetary policy. Ben Bernanke wrote a big paper about it: Japanese Monetary Policy: A case of self Induced Paralysis?
So even if China found itself in the exact same situation as Japan was that day, we'd only see the equivalent of a lost decade if the Chinese monetary policy was as backwards as that of the Japanese back then, and after that, and the latest world financial crisis, I'd be shocked if China repeated the behavior of yesteryear. This is especially true due to China's love of playing with the country's exchange rate. The Chinese central bank would not bat an eye if it had to devaluate the Renminbi forty percent.
So while the article describes the current situation very well, the predictions aren't really necessary given the premises.
Aren't they following the same path already? The massive dump in credit (cheap money) into the Chinese Banking system after 2008 seems to be following the same path that America/UK took after 2001. A recession causes the central bank to ease and real estate/asset bubbles begin to blow up but external factors (chinese export deflation in the 2000's, and weak global demand today) keep inflation low.
The cheap money effectively subverts large parts of the economy because they become dependent on it, but it only works while there are asset classes that can continue to rise and can be easily traded into and out of e.g. real estate.
Mr Bernanke as you quoted wrote a paper about this and yet in the end the Central Bank alone in the US could not contain the fallout when the bubble could blow no bigger. The US government had to absorb the losses by writing cheques to bailout the institutions that were failing until they reached a point where it was no longer politically feasible.
I don't see an easy solution to this, the issue is not just bad debt, it's that there won't be an asset class to bid up anymore, there won't be a practical way to get that easy credit into the system anymore.
The common factor across most political systems is that political/economic systems tend to carry on with the way they are going until they either proactively reform or hit a wall (a crisis or crash). The article explains well Japan's faults - without a definitive crash, politicians continued in their support of poor economic policies for a long, long time.
A few commenters argue that China is different - it has different features, but the above tendency will prevail here. Chinese politicians, businessmen and economists are hugely invested in a system that is top heavy, vastly corrupt and built around pillars of cheap labour, property/development and credit-based investment. Politically speaking, they are also committed to a system based around media control, repression, lack of debate and 'stability' (ie. no change of the political status quo).
My personal fear - my house, family and business are all in China - is that in the face of an economic crisis, we will also see a backwards slide into repression as the party attempts to put an iron grip on the economy AND public opinion.
My great hope is that China will see a few years of correction - letting the people's income catch up with the bubbles, supported by a government that is aware of the problems and motivated to act. Let's see...
I read the Quartz regularly and enjoy much of what they write. However, they do appear to have an obsession with China and are nearly all doom and gloom. Maybe that's because they're right and China is a house of cards about to fall but I've found I have to take everything they write on China with a pinch of salt as they write 1 or 2 articles per week on how screwed China is.
First I read all the comments already posted here. Then I read the fine article from beginning to end. This is a good article, and well worth a read. I am old enough to remember the kind of reporting that was done about Japan in the English-language press back when the book Japan as Number One[1] had just been published. Japan used to look unstoppable in the same way that China looks world-beating to many people now. But Japan's "lost decade" of minimal economic growth and declining soft power in the world has lasted a lot longer than just one decade.
Japan in the 1980s already had significant advantages that China still lacks in the 2010s. First of all, it had a political system with actual elections that weren't wholly rigged. (The political system in Japan has opened up more since then, but even thirty years ago it was well ahead of where China's political system is now.) Second, Japan had a free press and unfettered access to foreign reporters and foreign news media for decades by the 1980s. China still doesn't have either of those information channels for correcting problems in sufficient degree. Third, although primary education in China is quite good in urban areas, good primary education in China is still not as pervasive nationwide as it was in Japan by the 1980s. That's illustrated in part by how few people in China (compared to Japan) are even conversant in the national language. Barely more than half the population is conversant in standard Mandarin Chinese.[2]
China is at risk. The "socialism with Chinese characteristics" (中国特色社会主义) economic policy it officially now has cannot be sustained. It looks like it has been growing rapidly in recent years for some of the same reasons that Spain looked like it was growing rapidly a decade ago--a housing bubble. The inevitable correction that has to happen in the investment markets in China may not bring about a recession, but it can't help but bring about a change of investment priorities that may make China look less amazing for a while. China will really rise to world prominence when its common people enjoy free and fair elections, a free press, and good educational opportunity all over the country, something I hope they experience sooner rather than later. Meanwhile, I'm actually more optimistic about India during my lifetime.
South Korea - military dictatorship until the late 80s
Taiwan - one party state + martial law from 1949 - 1987.
Singapore - one party has held power for over 40 years.
These three countries have transformed themselves into advanced high-income economies. My expectation is that China will follow the same path as its neighbours - authoritarian government + restrictions on personal freedom during the rapid industrialisation phase, then eventually a transition to a functioning democracy once urbanisation is mostly complete. If China can attain the same GDP per capita as the Asian Tigers, then it will easily be larger than the US economy.
> China will really rise to world prominence when its common people enjoy free and fair elections, a free press, and good educational opportunity all over the country...
The whole Japanese 'lost decade' thing is misleading. It's based on absolute gdp numbers, not gdp per capita, which makes a big difference for a country like Japan where the population is steady or declining. If you compare US and Japanese growth per capita it's revealed that Japanese growth hasn't been far behind America's.
China is at risk, yes. So are all countries. I was just in a guest house this week-end and there were some books about China left left by the guests. Maybe five of them were about the imminent fall of China. One was published in the nineties, the other were in between.
And the article, from my Sino French perspective, smells very strongly as us centric, narrow minded, "only money counts" kind of thinking.
Since I've seen the same reason being given many times, and I don't actually know if it's true or not, I have to wonder: why do you think that free and fair elections along with free press a necessity for China to be world prominence in term of economy?
Democracy and freedom is certainly worth striving for, I just don't know if there is an absolute connection between them and economic power.
The game we Chinese are playing will not lead us to anywhere, but another rise and fall of rulers. We are staggering and stuck in a modern world that we are not able to sync with. Japan is somewhat worth envying since it transformed to better keep pace with the developed world. And yes, Japan has it's own issues or in other words, bottleneck that it is stuck with. Given the geopolitical and it's surrounding conditions, no easy way out for them.
Just to nitpick one of the claims in an otherwise well-reasoned comment - of course a lot of Chinese don't speak the national language. That's because for many Chinese people, Mandarin isn't their mother tongue - other Chinese dialects like Wu, Yue, etc. [1] As the BBC article you linked states, this is an issue of "linguistic unity" more than a symptom of a bad education system. Japan, as a much more homogeneous society, did not have this problem.
> China will really rise to world prominence when its common people enjoy free and fair elections, a free press, and good educational opportunity all over the country.
If you somehow knew that a hypothetical China in 2040 with all these things would still be pursuing domestic and foreign policy divergent from American interests, would you still be saying this? If so, I applaud your intellectual honesty.
The 400m people who can't speak mandarin statistic is a bit misleading. Most of these people are likely to be old and out of the workforce. it's rare to meet someone under 40 who can't speak ok Mandarin. Also a lot more people can understand it than speak it.
Not sure on the relevance on freedoms and election rigging but this statement -
"Third, although primary education in China is quite good in urban areas, good primary education in China is still not as pervasive nationwide as it was in Japan by the 1980s. That's illustrated in part by how few people in China (compared to Japan) are even conversant in the national language. Barely more than half the population is conversant in standard Mandarin Chinese"
To me means they have huge room for easy improvement and as such can continue growth for years.
I'm not too impressed by this argument. You could easily compare China with South Korea or Taiwan and come to the opposite conclusion. This is why you should never trust an argument that relies on two data points.
In fact, don't trust macroeconomists in general: individual preferences cannot be aggregated, at least not with our present mathematical tools. As a result, micro-founded macro models (99% of them) are complete nonsense: that's why Caltech doesn't even bother teaching macro to its PhD students anymore. It also explains why DSGE models have no predictive power whatsoever. Rant over.
One important point not mentioned: Japan were alone when the country's economy collapsed in late 80's. Today's China is surrounded with relatively strong peripheral economies (Taiwan, Korea, etc.) The support is there.
Also, do not discount black-market economy. It's difficult to keep track of economic progress in a cash-based economy. The strength of China's domestic economy is often discounted by foreigners because of economic activities unaccounted for.
The real worry is the aging population and the lack of social welfare.
While the lack of social welfare could be considered a problem from a moral perspective, in terms of the national economy it's not a negative.
Compare for instance the situation where 50% of elderly Chinese starve after they stop working, and the situation where 50% go on extensive state welfare. In both situations the elderly aren't producing anything, but in the latter they're consuming national resources and in the former they aren't, so from an economic perspective the former would produce better results.
Of course this isn't a very humane way of looking at it, but the Chinese leadership don't have a history of particularly humane behaviour.
Even if it starts stagnating it will pass the US in total GDP. China has 10x the population of Japan. Not that it matters. The average Chinese will still be a lot poorer than the average American.
However, thanks to the PRC's 1979 "one-child policy", they look to be the first country to skip from the "industrializing" stage which generally has reasonable population growth (weasel wording since Japan's fertility started declining in 1974 and has yet to stop), to the sort of modern social welfare state we see in the West with too few producers trying to support too many dependents. Except of course they don't have much of a welfare state.
It's sometimes called the 4-2-1 problem: 4 grandparents produced 2 parents who produced 1 child. It's one of the reasons for their very high savings rates, even with negative real returns. And like Japan, the retirees are in for unpleasant times when they try to turn paper wealth into real consumption.
That's a really nice piece, specially given the comparisons used in the article. However, as a layman, I wonder whether 1) chinese socialism and 2) its ownership of other major countries' debt make it all different or not. I suppose it does. Their government seems able to do "magic" tricks with its economy without pretty much any foreigner nosing around, and it also seems to me that the chinese are everywhere. I don't recall japanese companies owning so much of the world back in the 90's as the chinese do now with their infrastructures projects in South America and Africa, the US's debt thing etc. I think if they ever fail like the japanese did, they'd eventually drag a lot of countries with them down the hole because of these global tentacles.
Except if the only part of this article worth analysing is its very end: "[...] or permitting foreign banks to compete [in the chinese market]", then it's case closed and it was just a piece of banking propaganda against China.
Japan is actually the second biggest foreign holder of US debt. As of February 2014, Japan held 1.210 trillion of US debt while China held 1.272 trillion.
I am having trouble finding historical data, but what I can find from the 90s indicates that Japan alternated for the top foreign US debt holder with the UK. I am not really sure what data to look for general Japanese foreign investment.
> I don't recall japanese companies owning so much of the world back in the 90's as the chinese do now with their infrastructures projects in South America and Africa, the US's debt thing etc.
Don't you? There were jokes about how the Japanese owned so much of California they might as well buy the state from the US.
Yeah that's great. We're well on our way to a lost decade or two ourselves, replete with zombie banks and corporations. This might as well be an indictment of the decline of the US rather than the decline of China or Japan.
China's GDP has grown 7% or more every year since 1991. It had an impressive economic record before that as well. You can read gloomy articles like this going back to 1949. In that time, China has become the second largest economy in the world. I was reading articles like this a decade ago, I was reading articles like this two decades ago. People have been saying the sky is falling since 1949. Despite all of that, China's GDP will probably grow 7% this year, as well as 7% next year.
This Quartz website, often linked in HN, is a usability nightmare. In my Android phone's browser, I just cannot see any text at all, apparently I see a sidebar full-screen. In my choice desktop browser (Opera 12), I do see the article but for some reason it auto-scrolls up every few seconds, so I cannot read it.
I can read it in Firefox but with noticeable UI latency when scrolling, as if my computer was 3 or 4 years older than it is.
Quartz does the same thing in Opera 12 for me. (Hooray, I'm not the last Opera 12 holdout on the planet.) Turning off Javascript for the site makes it readable normally, though.
Ask anyone in the US trying to live off interest income right now, like my 77 and 80 year old parents. Aren't that real interest rates in the US negative or thereabouts, and I read that was true following the bust in Japan.
(Except of course in the US as of now our money isn't trapped in the country, unlike Japan's back then for individuals and small business as mentioned in the article, or China, who's currency wasn't even internationally traded until a pilot scheme started in 2009, and is still, in the scheme of things, taking baby steps.)
Well, I can't comment on the macro economics, but on the small business side, I can say that China will do much better than Japan. The Japanese are deadly afraid of commitment and responsibility for some reason (the culture, likely), which is not the case with the Chinese, who can bootstrap like crazy and are less afraid of taking risks - although the latter might be because they have nothing to lose. Plus, China's got 10x the population...
The Japanese are afraid of responsibility since what century exactly? I've never heard of that. I've only heard the opposite in fact: that being responsible is among the most important cultural things to the Japanese. You see it in the history of how they view employment between employers and workers for example. A general sense of making things right.
I think you'd be very hard pressed to find a people more responsible than the Japanese.
Could you base your arguments with some facts? I work in international company and don't find Chinese in the top risk taking colleagues (Americans win big in this area). That's equally anecdotal like in your case but since it is different experience it would be interesting to hear where you experience comes from.
Why no one mentioned the big difference between china and japan?
Japan is actually a dependant state of usa. So usa can take advantage of japan whenever it wants, consider the Plaza Accord when usa destroyed japan's economy.
China, whatever you name it, is a independent nation. It is not easy to order China to do something, not like japan.
[+] [-] nabla9|12 years ago|reply
China is still going through urbanization in unprecedented scale. About half of the Chinese live in cities now. By 2030, cities will be home to 70 per cent of China’s population and generate 75 per cent of its GDP. There will be 200 million Chinese moving into cities in next few decades. China can be close to where Japan is now in the 2040 banking crisis. For now, even massive crisis just delays the inevitable increase in demand that eats away all mistakes in fiscal and monetary policy.
http://insights.som.yale.edu/insights/what-should-we-underst...
http://www.cn.undp.org/content/china/en/home/presscenter/pre...
http://www.cn.undp.org/content/china/en/home/presscenter/pre...
[+] [-] camperman|12 years ago|reply
[+] [-] pingburg|12 years ago|reply
[+] [-] diminish|12 years ago|reply
[+] [-] ChrisGaudreau|12 years ago|reply
[+] [-] georgeecollins|12 years ago|reply
[+] [-] a8da6b0c91d|12 years ago|reply
[+] [-] hibikir|12 years ago|reply
So even if China found itself in the exact same situation as Japan was that day, we'd only see the equivalent of a lost decade if the Chinese monetary policy was as backwards as that of the Japanese back then, and after that, and the latest world financial crisis, I'd be shocked if China repeated the behavior of yesteryear. This is especially true due to China's love of playing with the country's exchange rate. The Chinese central bank would not bat an eye if it had to devaluate the Renminbi forty percent.
So while the article describes the current situation very well, the predictions aren't really necessary given the premises.
[+] [-] dageshi|12 years ago|reply
The cheap money effectively subverts large parts of the economy because they become dependent on it, but it only works while there are asset classes that can continue to rise and can be easily traded into and out of e.g. real estate.
Mr Bernanke as you quoted wrote a paper about this and yet in the end the Central Bank alone in the US could not contain the fallout when the bubble could blow no bigger. The US government had to absorb the losses by writing cheques to bailout the institutions that were failing until they reached a point where it was no longer politically feasible.
I don't see an easy solution to this, the issue is not just bad debt, it's that there won't be an asset class to bid up anymore, there won't be a practical way to get that easy credit into the system anymore.
[+] [-] westiseast|12 years ago|reply
A few commenters argue that China is different - it has different features, but the above tendency will prevail here. Chinese politicians, businessmen and economists are hugely invested in a system that is top heavy, vastly corrupt and built around pillars of cheap labour, property/development and credit-based investment. Politically speaking, they are also committed to a system based around media control, repression, lack of debate and 'stability' (ie. no change of the political status quo).
My personal fear - my house, family and business are all in China - is that in the face of an economic crisis, we will also see a backwards slide into repression as the party attempts to put an iron grip on the economy AND public opinion.
My great hope is that China will see a few years of correction - letting the people's income catch up with the bubbles, supported by a government that is aware of the problems and motivated to act. Let's see...
[+] [-] jusben1369|12 years ago|reply
[+] [-] AJ007|12 years ago|reply
http://www.nytimes.com/2014/03/21/business/international/blo...
[+] [-] tokenadult|12 years ago|reply
Japan in the 1980s already had significant advantages that China still lacks in the 2010s. First of all, it had a political system with actual elections that weren't wholly rigged. (The political system in Japan has opened up more since then, but even thirty years ago it was well ahead of where China's political system is now.) Second, Japan had a free press and unfettered access to foreign reporters and foreign news media for decades by the 1980s. China still doesn't have either of those information channels for correcting problems in sufficient degree. Third, although primary education in China is quite good in urban areas, good primary education in China is still not as pervasive nationwide as it was in Japan by the 1980s. That's illustrated in part by how few people in China (compared to Japan) are even conversant in the national language. Barely more than half the population is conversant in standard Mandarin Chinese.[2]
China is at risk. The "socialism with Chinese characteristics" (中国特色社会主义) economic policy it officially now has cannot be sustained. It looks like it has been growing rapidly in recent years for some of the same reasons that Spain looked like it was growing rapidly a decade ago--a housing bubble. The inevitable correction that has to happen in the investment markets in China may not bring about a recession, but it can't help but bring about a change of investment priorities that may make China look less amazing for a while. China will really rise to world prominence when its common people enjoy free and fair elections, a free press, and good educational opportunity all over the country, something I hope they experience sooner rather than later. Meanwhile, I'm actually more optimistic about India during my lifetime.
[1] http://www.amazon.com/Japan-Number-One-Lessons-America/dp/15...
[2] http://www.bbc.com/news/world-asia-china-23975037
http://news.xinhuanet.com/english/2007-03/07/content_5812838...
[+] [-] jstevens85|12 years ago|reply
Taiwan - one party state + martial law from 1949 - 1987.
Singapore - one party has held power for over 40 years.
These three countries have transformed themselves into advanced high-income economies. My expectation is that China will follow the same path as its neighbours - authoritarian government + restrictions on personal freedom during the rapid industrialisation phase, then eventually a transition to a functioning democracy once urbanisation is mostly complete. If China can attain the same GDP per capita as the Asian Tigers, then it will easily be larger than the US economy.
[+] [-] nahname|12 years ago|reply
Why?
[+] [-] logicchains|12 years ago|reply
[+] [-] gbog|12 years ago|reply
And the article, from my Sino French perspective, smells very strongly as us centric, narrow minded, "only money counts" kind of thinking.
[+] [-] NhanH|12 years ago|reply
Democracy and freedom is certainly worth striving for, I just don't know if there is an absolute connection between them and economic power.
[+] [-] LiweiZ|12 years ago|reply
[+] [-] azernik|12 years ago|reply
[1] http://en.wikipedia.org/wiki/Dialects_of_Chinese
[+] [-] austinz|12 years ago|reply
If you somehow knew that a hypothetical China in 2040 with all these things would still be pursuing domestic and foreign policy divergent from American interests, would you still be saying this? If so, I applaud your intellectual honesty.
[+] [-] galuggus|12 years ago|reply
[+] [-] pvdm|12 years ago|reply
[+] [-] aaron695|12 years ago|reply
"Third, although primary education in China is quite good in urban areas, good primary education in China is still not as pervasive nationwide as it was in Japan by the 1980s. That's illustrated in part by how few people in China (compared to Japan) are even conversant in the national language. Barely more than half the population is conversant in standard Mandarin Chinese"
To me means they have huge room for easy improvement and as such can continue growth for years.
I think you've successfully argued the opposite.
[+] [-] execonomist|12 years ago|reply
In fact, don't trust macroeconomists in general: individual preferences cannot be aggregated, at least not with our present mathematical tools. As a result, micro-founded macro models (99% of them) are complete nonsense: that's why Caltech doesn't even bother teaching macro to its PhD students anymore. It also explains why DSGE models have no predictive power whatsoever. Rant over.
[+] [-] lisptime|12 years ago|reply
http://econlog.econlib.org/archives/2008/03/junk_macroecono_...
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] magoghm|12 years ago|reply
[+] [-] cilea|12 years ago|reply
[+] [-] logicchains|12 years ago|reply
Compare for instance the situation where 50% of elderly Chinese starve after they stop working, and the situation where 50% go on extensive state welfare. In both situations the elderly aren't producing anything, but in the latter they're consuming national resources and in the former they aren't, so from an economic perspective the former would produce better results.
Of course this isn't a very humane way of looking at it, but the Chinese leadership don't have a history of particularly humane behaviour.
[+] [-] aarkling|12 years ago|reply
[+] [-] hga|12 years ago|reply
It's sometimes called the 4-2-1 problem: 4 grandparents produced 2 parents who produced 1 child. It's one of the reasons for their very high savings rates, even with negative real returns. And like Japan, the retirees are in for unpleasant times when they try to turn paper wealth into real consumption.
[+] [-] caio1982|12 years ago|reply
Except if the only part of this article worth analysing is its very end: "[...] or permitting foreign banks to compete [in the chinese market]", then it's case closed and it was just a piece of banking propaganda against China.
[+] [-] Amezarak|12 years ago|reply
http://www.treasury.gov/ticdata/Publish/mfh.txt
I am having trouble finding historical data, but what I can find from the 90s indicates that Japan alternated for the top foreign US debt holder with the UK. I am not really sure what data to look for general Japanese foreign investment.
[+] [-] lmm|12 years ago|reply
Don't you? There were jokes about how the Japanese owned so much of California they might as well buy the state from the US.
[+] [-] Zigurd|12 years ago|reply
http://snbchf.com/global-macro/gdp-growth-per-capita/
As the proverb goes, we need to take the plank out of our own eye. Those commies in Sweden are kicking our libertarian asses.
[+] [-] waterlesscloud|12 years ago|reply
[+] [-] msandford|12 years ago|reply
[+] [-] firstOrder|12 years ago|reply
[+] [-] Al-Khwarizmi|12 years ago|reply
I can read it in Firefox but with noticeable UI latency when scrolling, as if my computer was 3 or 4 years older than it is.
Seriously, these guys should fix their website...
[+] [-] T-hawk|12 years ago|reply
[+] [-] Gravityloss|12 years ago|reply
[+] [-] hga|12 years ago|reply
Ask anyone in the US trying to live off interest income right now, like my 77 and 80 year old parents. Aren't that real interest rates in the US negative or thereabouts, and I read that was true following the bust in Japan.
(Except of course in the US as of now our money isn't trapped in the country, unlike Japan's back then for individuals and small business as mentioned in the article, or China, who's currency wasn't even internationally traded until a pilot scheme started in 2009, and is still, in the scheme of things, taking baby steps.)
[+] [-] garfelnagel|12 years ago|reply
[+] [-] jotm|12 years ago|reply
[+] [-] adventured|12 years ago|reply
I think you'd be very hard pressed to find a people more responsible than the Japanese.
[+] [-] daliusd|12 years ago|reply
[+] [-] phoebus|12 years ago|reply