How China can avoid a replay of Japan’s lost decades
Stephen Roach says China’s embrace of structural rebalancing distinguishes it from Japan but success will hinge on its willingness to confront the powerful vested interests resisting economic reform
Despite deepening concerns about China’s economy, the country is not heading towards “lost decades” of Japanese-style stagnation. And yet a worrisome ambiguity clouds this verdict. Japan’s fate was sealed by its reluctance to abandon a dysfunctional growth model. While China’s embrace of structural rebalancing distinguishes it from Japan, it is struggling to implement that strategy. Unless the struggle is won, the endgame could be similar.
The same conclusion emerges from a seminar, “The Lessons of Japan”, that I have taught at Yale for the past six years. The course is primarily one in forensic macroeconomics – distilling key lessons from the rise and fall of the modern Japanese economy and then figuring out their relevance for other major economies.
The seminar culminates with student research papers aimed at assessing which candidates might be the next Japan. As recently as 2012, the US was the top choice, as it struggled to regain its footing in the aftermath of the 2008 financial crisis. Not surprisingly, by 2013, the focus had shifted to crisis-battered Europe. But, this year, more than half of the students in the seminar chose to examine whether China might be the next Japan.
An academic setting provides a wonderful intellectual laboratory. But a couple of quick trips to China after the end of the spring term gave me a different perspective. In extensive discussions with Chinese officials, business leaders, academics and investors, I found great interest in the lessons of Japan and how they might bear on China’s conundrum.
China to see lower debt level as ‘supply-side reform’ bears fruit
The topic du jour was debt. China’s non-financial debt has risen from 150 per cent of GDP in 2008 to 255 per cent today, with two-thirds of the increase concentrated in the corporate sector, largely state-owned enterprises. As the world’s largest saver – with gross domestic saving averaging 49 per cent of GDP since 2007 – surging debt hardly comes as a surprise. High-saving economies are prone to high investment, and the lack of capital market reform in China – exacerbated by the bursting of the equity bubble in 2015 – reinforces the disproportionate role that bank credit has played in funding China’s investment boom.