The first time economists globally predicted China was going the Japanese ‘lost’ way was over a decade ago when China had just displaced Japan from the rank of the world’s No.2 economy. The old debate has revived again. Interestingly, in China, the experts are offering the same old reasons to dismiss the concerns – Japan was Japan, China is not Japan.
In the last week of last month, the Nobel Laureate and renowned economist Paul Krugman reminded us that almost a quarter century ago the airport bookstores were full of paperbacks with samurai on the cover. The message was clear: the coming economic battle was going to be among Japan, Europe, and America. Krugman observes in his NYT column: “The timing of this obsession with Japan was perfect – almost at the moment when Japan’s remarkable rise turned into a sustained decline in economic power.” But Krugman’s July 26 column was less about everyone’s obsession with “once upon a time” rising Japan and more about “Will China repeat the mistake of Japan?”
We shall return to Krugman’s China question in a while. Because Krugman is not the first economist forewarning us that China is faltering and probably “it will be worse in China.” Nor is the debate new that China will go down Japan’s “lost” road.
Twelve years ago, Martin Wolf, then associate editor and chief economic commentator at the Financial Times had raised similar concerns and commented how China could yet fail again like Japan. “Until 1990, Japan was the most successful large economy in the world. Almost nobody predicted what would happen to it in the succeeding decades. Today, people are yet more in awe of the achievements of China. Is it conceivable that this colossus could learn that spectacular success is a precursor of surprising failure? The answer is: yes,” Wolf had confidently predicted.
Wolf noticed that Japan’s gross domestic product per head spectacularly rose from a fifth of the US levels in 1950 to 90 percent in 1990, but went into reverse and two decades later (in 2010) fell to 76 percent of US. Wolf’s confidence (that China would repeat the mistake Japan made) was based on a very simple calculation: “China’s GDP per head jumped from 3 percent of US levels in 1978, when Deng Xiaoping’s ‘reform and opening up’ began, to a fifth of US levels, today.” Therefore, Wolf inadvertently resorted to tautology to believe China would replicate Japan’s recession-way.
However, most experts and analysts in China held on to believing “Japan was Japan, China is not Japan.” Interestingly, economists in China duly acknowledged that Wolf’s analysis had drawn wide attention in China, and generally could not easily dismiss Wolf’s thesis that “spectacular success often came with spectacular failures.” There were heated debates on China’s rather pro-active social media platform, Weibo, between “cyber nationalist” economists and mainstream or pro-establishment experts. Influential Chinese economists Wu Jinglian, 93, – considered by all one of China’s foremost pro-market economy experts and Xie Guozheng, for example, contradicted each other in their respective Weibo blogs. The former speculated that China would soon endure its “lost decade”; whereas the latter publicly declared that if [China’s] reforms went perfunctory, it will repeat the mistake Japan made.
Upholding the view that the GDP growth rate depends on the population growth rate and the per capita growth rate, Cai Fang, the then director of the Population Institute of the China Academy of Social Sciences, forewarned Chinese authorities to learn from the “demographic” lesson of Japan. “Japan’s total fertility rate began to fall below the replacement level in the 1960s and 1970s, and the economy fell into a slump more than two decades later,” Cai Fang wrote.
In Cai Fang’s observation, what was most scary about China was that its total fertility rate of 1.4 was much lower than that of Japan in the 1960s and 1970s. Therefore with the advancement of urbanization, industrialization and socialized pensions, the ultra-low fertility rate will continue, which means that in the future China it will not be a decade but a 100 years lost. [Emphasis added]
Let us now return to Krugman’s prognosis that emphasizes not only China seems to be faltering lately but “it [China] will be worse” compared to Japan’s decline.
Krugman’s assessment that China is unlikely to be next Japan but it is going to do worse, is based on various factors, such as China’s higher youth unemployment, on technological frontier Chinese economy is much behind Japan’s in 1990, shrinking working-age population, too low consumer demand, over-inflated real estate industry, and that China’s economy is extremely unbalanced etc. and so on. More than some of the aforementioned listed factors, Krugman lays emphasis on the fact that there is growing concern that China may have fallen into a “middle-income trap.”
Joining the debate whether China is staring into Japan-like “lost decade,” Beijing-based popular financial news digital platform, the Financial World or jrj.com – its website claims nearly two-decade old online financial daily has tens of millions of daily visitors, in a recent analysis claimed “comparisons with Japan in 1990 are too simplistic to be taken seriously.” Referring to some experts who say China is currently experiencing “balance sheet recession,” the jrj.com analysis does not deny the comparison between China’s economy today and Japan’s in the 1990s.
However, Li Xuelin, the author of the report says there are many similarities in the growth patterns between China and Japan, but there are still big differences. “The history will repeat itself, but not simply,” Li wrote. Rejecting Krugman and others who expressed concerns about China getting stuck in a middle-income trap, Li argues China has several advantages that Japan did not.
Therefore, in Li’s view, from the perspective of the system, unlike Japan, China has the ability to organize resources and guide the development of new industries. Last but not least, in the past two-three decades, like several major economies Japan experienced negative and zero growth more than once, on the other hand China in the corresponding decades – not even during the pandemic 3-year period, did not have such experience.
Li further added, a major factor why the Chinese economy will be able to escape stagnation and cliff-like decline in the coming years is that the government can play an important role in the allocation of resources in China. “During the period of the real estate bubble in Japan, there were very few land and financial controls, so that the central bank, financial institutions and enterprises were deeply involved in the stock market and property market,” Li contended.
Just as the former CASS economist Professor Cai Fang had rejected the prediction by the FT’s Martin Wolf in 2011 that China was bound to follow Japan’s mistaken trajectory in the 1990s. Cai, who is now retired but is a member of the People’s Bank of China’s Monetary Policy Committee, strongly believes that notwithstanding various factors – including the pandemic-caused slowdown, which have become a key obstacle hindering China’s economic recovery, the only way China could avoid running into a “lost decade” is to reverse the sluggish consumption as early as possible. Contrary to such views, renowned and influential Chinese economist Justin Yifu Lin prescribes investment-driven economy over consumption-driven economy.
Finally, it is evident from the contrasting views among China’s leading economists and experts, the need of the hour for the world’s largest economy (in PPP terms) is a crystal-clear strategy to steer clear from repeating the mistake Japan had made. But if what some Chinese experts had warned a decade ago is ignored and the policymakers choose to stick to dogma, as Fu Linghui of China’s National Statistics Bureau did last Tuesday denying that “there is deflation” in China today, then the perfunctory approach will ensure that “China today is definitely Japan of the 1990s.”