Ben Chu: China could be the new Japan if it doesn't heed signs of stagnation - Business Comment - Business - The Independent

Ben Chu: China could be the new Japan if it doesn't heed signs of stagnation

Economic View: Looking at the numbers, the outlook could actually be even worse for China

Not long ago there was talk about Western economies falling prey to the Japanese economic disease – a reference to endless stagnation in the wake of a massive asset bubble burst. But perhaps that was the wrong comparison.

A compelling new paper from Brian Reading and Diana Choyleva of Lombard Street Research suggests that it's actually China, rather than the West, which is at greatest risk of turning Japanese.

At first glance that sounds far fetched. China's growth might have moderated of late but the economy is still growing at around 7.5 per cent a year. If the country carries on expanding at that rate it will be the world's largest economy by the end of the decade, surpassing the United States. The idea that this powerhouse could be at risk of slumping into decades of disappointing growth in the manner of its Asian neighbour calls for a stretch of the imagination.

Yet Mr Reading and Ms Choyleva see similarities between Japan in the era of its economic miracle between the 1950s and the 1970s and China's growth model today. Both show a large class of repressed savers, with the public essentially compelled to lend cheaply, through the tightly controlled banking system, to the business sector. Both exhibit high investment rates, with GDP growth driven by high rates of capital spending. And both countries rely on strong foreign demand for exports, boosted by an undervalued currency.

The authors also point to structural parallels. They highlight the similarities between the Japanese "keiretsu" system – the tight links between businesses in different sectors involving cross-shareholdings – and the crony arrangements that prevail in much of Chinese industry and government today.

The Japan analogy is, obviously, an unwelcome one for the authorities in Beijing given the implication that stagnation could set in at some point. And looking at the numbers the outlook could actually be still worse for China if this analysis is correct.

The authors argue that Japan's business and government sector invested to excess in its boom, resulting in a misallocation of resources which, ultimately, turned into a significant drag on growth as banks were encumbered by bad loans. But, as the chart above shows, China's gross capital investment levels in recent decades have actually been even higher. While Japan invested up to 36 per cent of its GDP in its fast growth phase, China has lately been investing close to 50 per cent. As the University of California economics professor Barry Eichengreen puts it: "No economy can productively invest such a large share of its national income for any length of time."

It is a sign of how reliant on investment China has become that trade, though exports are still a large share of GDP, has been making no net contribution to annual growth since the global financial crisis of 2008.

A slowdown could also be more painful for China than it was for Japan if it happens any time soon. When Japan's asset bubble burst in the late 1980s per capita incomes had pretty much caught up with those in the West. In China average incomes are, at present, only around a fifth of those in the US.

China's population is also ageing faster than Japan's did, thanks to the one-child policy, which will add further to the economic pressures of any slowdown. Japan developed world-class manufacturing and technology companies such as Toyota and Sony by the time it stagnated, which enabled it to continue exporting and innovating. China has yet to develop national business champions of similar quality and levels of innovation fall well short of its main competitors.

The China/Japan parallels identified by Lombard Street Research are illuminating. And the conclusion of the authors – that China urgently needs to enact far-reaching structural reforms – is well made. China can't keep driving growth through high savings, high investment and by the accumulation of ever higher mountains of questionable bank loans. Internal consumption needs to take on a bigger role in driving growth. The financial system needs to be liberated and interest rates determined by the markets.

It will not be easy. Japanese governments, despite a democratic political system, found it impossible to take on powerful vested interests. It could prove even harder for a post-Communist authoritarian regime like China, which is only really held together by mutual material self-interest. One previous attempt at banking reform, led by former prime minister Zhu Rongji, was beaten back.

But there is a small light of comfort for China. There was nothing inevitable about Japan's economic malaise over the past 20 years. The country has been cursed by a hidebound central bank which tolerated destructive deflation and whose blocking influence on stimulus has only this year been overcome by Shinzo Abe's administration.

China doesn't suffer from such monetary conservatism. If anything the Beijing authorities have been too willing to stimulate in response to growth slowdowns. And President Xi Jinping and his team, which took power last autumn, certainly say all the right things about reform. Now we wait for the delivery.

In the end, all economies, like Tolstoy's families, are dysfunctional in their own individual ways. But that doesn't mean they can't learn from each other's mistakes. They can and must.

Suggested Topics
News
Paper trail: the wedding photograph found in the rubble after 9/11 – it took Elizabeth Keefe 13 years to find the people in it
newsWho are the people in this photo? It took Elizabeth Stringer Keefe 13 years to find out
Arts and Entertainment
Evil eye: Douglas Adams in 'mad genius' pose
booksNew biography sheds light on comic genius of Douglas Adams
Sport
FootballFull debuts don't come much more stylish than those on show here
News
i100
PROMOTED VIDEO
Life and Style
Kim Kardashian drawn backlash over her sexy swimsuit selfie, called 'disgusting' and 'nasty'
fashionCritics say magazine only pays attention to fashion trends among rich, white women
Arts and Entertainment
TVShows like Agents of S.H.I.E.L.D are little more than marketing tools
Arts and Entertainment
Hit the roof: hot-tub cinema east London
architectureFrom pools to football pitches, rooftop living is looking up
Travel
travel
News
The ecological reconstruction of Ikrandraco avatar is shown in this illustration courtesy of Chuang Zhao. Scientists on September 11, 2014 announced the discovery of fossils in China of a type of flying reptile called a pterosaur that lived 120 millions years ago and so closely resembled those creatures from the 2009 film, Avatar that they named it after them.
SCIENCE
Life and Style
tech
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Matisse: The Cut-Outs exhibition attracted 562,000 visitors to the Tate Modern from April to September
art
Life and Style
Models walk the runway at the Tom Ford show during London Fashion Week Spring Summer 2015
fashionLondon Fashion Week 2014
News
Kenny G
news
News
peopleThe black actress has claimed police mistook her for a prostitute when she kissed her white husband
Life and Style
techIndian model comes with cricket scores baked in
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Developer - Watford/NW London - £280 - £320 p/d - 6 months

£280 - £320 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Senior BA - Insurance **URGENT**

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Training Coordinator / Resource Planner - City, London

£35000 - £38000 per annum + Benefits: Ashdown Group: Training Coordinator / Pl...

Data Governance Manager (Solvency II) – Contract – Up to £450 daily rate, 6 month (may go Permanent)

£400 - £450 Per Day: Clearwater People Solutions Ltd: We are currently looking...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week