China - the next Japan?

[Shadow Kira01]

I do not think it is possible due to a variety of factors, even though there are quite a number of similarities. First of all, the political system is very different in regards to most policies. Secondly, the most important factor is that the economic growth issue works differently.

China relies on cheap labor and resources through poor to average quality production which is dependent on the cash flow of foreign investors. Due to the aid of foreign investors, they are also receiving support from foreign governments because of the lobbying and also the fact that many of these foreign investors are bigwigs with influence in the government. Japan, on the other hand receives its economic growth primarily from profits reaped in the overseas. If the economy in the overseas, such as the United States and Europe deteriorates, it affects the overall economy of Japan itself. For that matter, China's economy works in an opposite direction to that of Japan's.

And thus, it is not possible for China to achieve a similar burst of Japan's when they are heading in an opposing direction economic-wise. However, due to the similarities posed by the current economic situation, people may feel that it is similar yet it actually isn't.

[Theowne]

If the economy in the overseas, such as the United States and Europe deteriorates, it affects the overall economy of Japan itself. For that matter, China's economy works in an opposite direction to that of Japan's.

Wait, what? You're saying China won't be affected if all the rich nations that manufacture there products there start going downhill?

[TinyRedLeaf]

I caught up with some friends in the financial sector over the past week, and we would always end up discussing China sooner or later (for obvious reasons; China is the only bright spark, other than India, in global markets at the moment). In particular, I wanted to hear their views regarding the following assessment by George Friedman, published in his book, The Next 100 Years.

Spoiler for length:

Abridged from Chapter 5, China 2020: Paper Tiger

There has been a great deal of discussion on China as a future global power. Its economy has been surging dramatically in the past 30 years, and it is certainly a significant power. But 30 years of growth does not mean unending growth. It means that the probability of China continuing to grow at this rate is diminishing.

The open question is whether the internal forces building up in China can be managed. China is gambling that it can carry out an indefinite balancing act. The assumption is that it will be able to gradually shift resources away from the wealthier coastal regions towards the interior without meeting resistance from the coast, and without encountering restlessness in the interior. Beijing wants to keep the various parts of China happy and is doing everything in its power to achieve that end.

Rising bad debt
However, there is a serious problem. China appears to be a capitalist country with private property, banks and all the other accoutrements of capitalism. But it is not truly capitalist because markets do not determine capital allocation. Who you know counts for much more than whether you have a good business plan.

Between Asian systems of family and social ties, and the communist systems of political relationships, loans have been given out for a host of reasons, none of them having much to do with the merits of the business.

As a result, not surprisingly, a remarkably large number of these loans have gone bad — “non-performing”, in banking jargon. The amount is estimated at somewhere between US$600 billion and US$900 billion, or between a quarter and a third of China’s GDP, a staggering amount.

These bad debts are being managed through very high growth rates driven by low-cost exports. The world has a huge appetite for cheap exports and the cash coming in from them keeps Chinese businesses with huge debts afloat.

But the lower China sets its prices, the less profit there is in them. Profitless exports drive a giant churning of the economic engine without actually getting it anywhere. Think of it as a business that makes money by selling products at or below cost — a huge amount of cash flows into the business, but it flows out just as fast.

Japan's experience
This has been an ongoing issue in East Asia, and the example of Japan is instructive. Japan during the 1980s was seen as an economic superpower, but its rapid growth at the time had less to do with management than with Japan’s banking system.

Japanese banks, under government regulation, paid extremely low interest rates on money deposited by ordinary Japanese. Under various laws, the only option for most Japanese was to put money into Japan’s post office, which doubled as a bank. The post office paid minimal interest rates. The government turned around and lent this money to Japan’s largest banks, again at interest rates well below international levels.

These banks lent it again cheaply to businesses with which they were linked — Sumitomo Bank lent money to Sumitomo Chemical, for example. While American companies were borrowing money at double-digit rates in the 1970s, Japanese companies were borrowing money at a fraction of that amount.

While high interest rates imposed discipline on Western economies, culling out the weaker companies, Japanese banks were lending money at artificially low rates to friendly corporations. No real market existed. Money was flowing and relationships were the key.

The casual ways in which Japanese banks made loans increased the number of non-performing loans — loans that were not being repaid. A lot of bad ideas were funded. Rather than write these off and let the businesses involved go into bankruptcy, Japanese banks covered up with more loans to keep the companies alive.

The system was awash with money, but underneath it a vast array of companies on life support — and companies struggling to increase cash without regard for profit — were undermining the entire financial system. It was just churning to keep itself afloat. In the end, the debt structure grew too massive and it became impossible to stay in front of it with exports.

China is Japan on steroids
How is this relevant to China? China is Japan on steroids. It is not only an Asian state that values social relations above economic discipline, but also a communist state that allocates money politically and manipulates economic data. It is also a state in which equity holders — demanding profits — are less important than bankers and government officials, who demand cash.

Both China and Japan rely heavily on exports; both have staggeringly high growth rates, and both face collapse when the growth rate begins even to barely slow.

Japan’s bad debt around 1990 was about 20 per cent of GDP. China’s, under the most conservative estimate, is about 25 per cent — I would argue that the number is closer to 40 per cent.

China’s economy appears healthy and vibrant, but growth is only one factor to examine. The more important question is whether such growth is profitable. Much of China’s growth is very real, and it generates the money necessary to keep the banks satisfied. But this growth does not really strengthen the economy. If growth were to slack off, for example, because of a prolonged recession in the United States, the entire structure could crumble very fast.

China has expanded extraordinarily for the last 30 years. The idea that such growth rates can be sustained indefinitely, or even permanently, violates basic principles of economics (the law of diminishing returns). At some point, the business cycle — culling weak businesses — must rear its ugly head.

And it will happen. At some point, a simple lack of skilled labour will halt continued growth. There are structural limits to growth, and China is reaching them.

While I found much of the book to be the stuff of an overblown imagination, the earlier chapters were, to me, fairly sound, especially the above chapter on China (there's much more to it; buy or borrow the book to find out).

What amuses me is that my friends pretty much agreed with the broad scope of the analysis, although none of them would care to admit their fears openly. One of them even told me, jokingly, that everyone knows that China's growth is unstainable, but they'd prefer not to think about it. As I've suggested earlier in this thread, the solvency of China's banks is a huge unknown that no one wants to probe too deeply into.

For why would any canny financier want to do so? The unspoken fear is that should China's cover be blown, it could well trigger a run on its banks, and the subsequent meltdown will very definitely be very ugly, both for China and the rest of the world.

[Fate21]

But China is not famous its anime or manga.

[Lathdrinor]

I'm not an economics expert, but it seems to me some basic logic must hold in even such an arcane art. One such logic is the cardinal rule of production: so long as you are able to produce what you need and have spare production capabilities after, you can attain a surplus and develop the country. This goes for resources, manpower, and just about everything else.

China's market capitalism experiment may or may not bust. But this is a country that's lived under a command economy for decades - a pretty disastrous one, true, but still one that developed the country's industries and infrastructures. Those legions of factories, roads, power plants, mines, and universities must count for something, even if the entire export-oriented strategy fails altogether. The only question, then, is whether China has enough resources to sustain a collapse of its exports, which will lead to a drastic reduction in the nation's coffers and therefore its ability to import from elsewhere.

Well, does it? That's the question I'm looking for an answer to.

[Oppius]

I guess what Japan and Western countries are afraid of is China wants to have its own economical block. If it happen, China someday surpass Japan in economy.

[TinyRedLeaf]

Originally Posted by Lathdrinor

China's market capitalism experiment may or may not bust. But this is a country that's lived under a command economy for decades - a pretty disastrous one, true, but still one that developed the country's industries and infrastructures. Those legions of factories, roads, power plants, mines, and universities must count for something, even if the entire export-oriented strategy fails altogether.

Japan smothered itself with concrete throughout its boom years. Sure, on paper, it counted as "productivity growth" to a certain extent, but it certainly didn't prevent its disastrous bust in the 1990s.

Originally Posted by Lathdrinor

The only question, then, is whether China has enough resources to sustain a collapse of its exports, which will lead to a drastic reduction in the nation's coffers and therefore its ability to import from elsewhere.

From what I've been reading so far, and also based on what observers tell me, China's growth is made possible by an enormous pool of cheap labour. That is the key factor that enables China to be the factory to the world. But cheap labour will eventually run out, as rampant growth inevitably leads to inflation.

Already, for example, textile producers are moving out of Guangdong and setting up shop in Vietnam as labour costs in that part of China have ceased to be internationally competitive. This trend will become increasingly apparent towards the future.

So, much depends on how well China manufacturers can scale the value ladder and shift towards increasingly capital-intensive production that leverages on the skills and knowledge of its people, instead of pure brute labour. Mind you, there are plenty of Chinese PhDs out there, and plenty more intelligent Chinese nationals who are keen to go back to their homeland after a few years of working abroad.

All this, however, doesn't remove my greatest concern: the solvency of China's banking system. I strongly suspect that much of it is running on hot air. But, as last year's Wall Street crisis has demonstrated, "hot air" is relative. Investors and speculators are perfectly happy to live on pipe dreams, so long as no one comes around to cry wolf. All it would take is for someone to prove conclusively that the Emperor is wearing no clothes, and everything could come crashing down like a house of cards.

[Lathdrinor]

Originally Posted by Eipuriru

I'm gonna talk about china music/film artists. There is no way that china will ever become the next japan (and I'm not try to be nasty since I am part Chinese) but just looking at japans music talents we can tell that china copy a lot of japans idea.
E.g. Morning musume the best selling girl band in japan was copied by china and they formed many girl bands like them however they all end up splitting due to being unsucessful.
It's hard to compare the two countries since their cultures are similar yet very different at the same time

I believe it's quite premature to talk about China's entertainment industry when most of its people still live in poverty.