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Is China the Next Japan?

For years economists have wondered whether the inevitable rising power of China was similar to Japan in the 1980s. If you remember (and that requires you to be over 22), people used to think that Japan was an unstoppable beast destined to take over the world. Movies and popular media frequently made reference to this, of in now-comical ways.

Among some of the most notable examples of this frenzy were Gung Ho (Ron Howard’s film), the scene in Back to the Future II when old Marty is talking to his Japanese bosses, and the hilariously out of date Rising Sun, which was a Michael Crichton book, turned into a movie only after Japan’s downfall had already become clear. The popular theory was that Japanese people were more dedicated to their work, and willing to put in longer hours than people in the West. This gap in work ethic meant that Japan was an unstoppable force in the global economy, and that we would all soon be working as mannies in Tokyo.

As it turned out, Japan was able to maintain its place as a superpower economically, but it is hardly hegemonic the way that people expected. People in the West were not quite as lazy as we thought (shout out to the French 35-hour work week. Way to continue to promote the theory!) Japan does not own the US or Europe. On the contrary, they are still digging themselves out of a decade-long recession that actually saw deflation, something rarely seen since the Great Depression.

Experts will generally tell you that China is a completely different situation. The common argument is that the sheer population size of the country makes it an inevitable economic power. However, it seems like this point, in isolation, falls flat, otherwise China surely would have become an economic titan years ago.

The second point is that the driving force is not only population. Rather the (relatively) newly open economy has helped shed the chains of communism that previously held the country back. In combination, these two factors are propelling China ahead of the pack.

Yet for all of the rhetoric that China is the heir apparent to economic hegemony, there has been no shortage of reporting on the problems with its current policies. Most notably poor safety regulation, IP piracy (which hinders innovation), and the developing environmental disaster, all serve to set back the recent economic push. These factors should be tamping down on what some might label irrational exuberance.

Perhaps even more compelling is lack of underlying logic to why China will dominate the global economy (whereas there was a case with Japan, even thought the theory proved flawed). While there are Chinese entrepreneurs who have shown a knack for innovation and even brilliance, the greater work force shows more remnants of communistic tendencies than signs of a dynamic work ethic.

China backers will make the case that Japan’s unprecedented rise was based largely on an illusion, namely the absurdly inflated property prices that created vast amounts of paper money and spurred poor investment decisions. When this bubble burst it brought reality to the markets, and made Japan’s place as a strong, but not dominant economic player, all the more apparent.

It should be pointed out that China also shows signs of major flaws in its economy. Many have argued that there is a property bubble, although not on the scale of Japan in the 1980s. It has rampant corruption, fueling both the property problem as well as the massive amounts of NPLs (non-performing loans) that continue to raise red flags in the banking industry. And finally China’s economic system is not developed enough to reign in economic growth to curb inflation. Interest rates are essentially irrelevant when loans are not made on economic criteria.

None of this is to say that China will not become a major player in the world economy. Clearly it already has and there is no reason to believe that even a precipitous collapse, something that seems unlikely, would be so devastating the country could not recover. South Korea, for example, is in a strong position only ten years after an unmitigated disaster.

The question is not about whether China will be a power, it is about if the country will become an economic hegemon.

If you like Daily Tea Leaves you might also like Josh's personal blog Cup of Cha.

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Funny how the link to the

On November 2nd, 2007 Falen (not verified) says:

Funny how the link to the NPL is an article back in 2004, which is like 9 China years ago.

Welcome to 2007, where major Chinese banks are posting record profit. Bad loans cut down and others performing well.

NPL

On November 2nd, 2007 Josh says:

That was an old link, but lest you think the problem is gone there are articles here from this year:
chinaeconomicreview.com/cer/info/Dealing_in_debt.html
cnbc.com/id/21556491

It's true the NPL rate is improving, but only three massive government bail-outs saved the industry to begin with.

Right on. I agree with you.

On November 2nd, 2007 Floating (not verified) says:

Right on. I agree with you. Awhile back there was a report by some Chinese research institute which basically said the same thing.

My own views on this is that China has way too many problems to become the dominating power like the U.S is today.

Also I'm really concerned about the environment. It's the Darwin award at work. You do stupid things and it's bound to affect you in major screwed up ways. Just look at the recent reports on high rate of birth deformities for Chinese babies. Some other report on Chinese girls that are getting their period at 10 years old, or the story about some 6 year olds growing a beard. Not even mentioning the over population problem, and the problems 30 years down the road with respect to the society turning social security recipients over night.

But I'm not a freakin hippie that spits doom and gloom all day, someone who thinks the world is doomed no matter what. I have hopes that we can fix the problems. I really hope so...

Problem might persist but it

On November 3rd, 2007 Falen (not verified) says:

Problem might persist but it has ceased to be one of those "coming collapse of China" doomsday scenarios. Give it another two year the whole NPL issue would be wholly relegated to the history books.

NPLs are not the problem

On November 4th, 2007 Anonymous (not verified) says:

Wait until the Chinese workforce turns upside down. The US is headed there now as the baby boomers retire. How will the state respond to the strain of hundred of millions of elderly?

Okay I'll bite

On November 4th, 2007 Anonymous (not verified) says:

How does IP piracy hinder innovation?

Is China the Next Japan? Not Even Close.

On November 4th, 2007 RobertinSeattle (not verified) says:

Great piece, Joel. I consistently point out to a lot of people who make the same analogy that China is definitely NOT the next Japan. Or Taiwan. Or Korea for that matter. In fact, China is fast moving into its position as the dominant global power over the next 5 - 10 years. I've been pointing out that while most of China's smaller Asian neighbors have enjoyed that initial explosive growth, none have been able to sustain that momentum. Mostly, it's because of a combination of a ever-growing population and simple economics; thee factors along with some other peripheral effects help to move China into a much more powerful position globally.

As you probably already know, the Chinese government has been careful with internal migration of laborers from farms to factories. Each year, a limited number of new laborers are allowed to go to the cities to earn a better living in factories. As these workers become more affluent, they become a part of a fast-growing middle class that consumes middle-class goods. This is what happened in Japan and Taiwan and Korea. However, as the laborers got tapped out and the middle classes began to stagnate, that country fell out of grace on the global scene. China, with its seemingly limitless labor force to replace its upwardly mobile workers, will soon have a middle class that exceeds our middle class here in the States, consuming more of their own goods than what they export. At that point, China will emerge as the dominant global power economically.

As much as Americans have denounced China's Tianenmen Square (don't forget we had Kent State!), the politboro's decision to slow down the revolution at all costs has proven to be a sound decision. Why? Against the backdrop of what happened at the same time in Red Square in Moscow that led to the disastrous collapse of the Soviet Union, I think the Chinese made a sound decision for the greater good. The results are only now becoming more apparent. The Chinese have an incredibly long view on history and as such will continue to advance their vision patiently and with a firm hand.

IP Question

On November 4th, 2007 Josh says:

To answer the question about how IP piracy hinders innovation, think about what the incentive for coming up with a ne technology would be if there was no pay off. If anyone can re-create your ideas, why should you continue to innovate?

No, Japanese people have

On November 6th, 2007 Admagic (not verified) says:

No, Japanese people have manners.

I think that China is a

On May 12th, 2008 Princess Cruises (not verified) says:

I think that China is a rising star also. This country will prove a lot in the future, and improve as well. Someday China will be a world leader and then it will be great, because there work field is the biggest in the world.

reply

On June 30th, 2008 link building (not verified) says:

The actual gap between Japan and the rest of industrialized world is not that large because Japanese statistics also include data on simple manipulators that are controlled by mechanical stops and these machines would not pass a stricter definition of industrial robots used in the US and the EU.

It seems as if, no matter

On July 1st, 2008 custom link building (not verified) says:

It seems as if, no matter how many of his players leave because of free agency or being cut or traded because of bad conduct or selfish attitude, his system continues to produce winning results - regardless of the number of new players being plugged into the system.