'China likely to end up as former would-be superpower', says man who foresaw Japan's demise

Forecasts for China to surpass the US as the world's main economic power are misplaced. So says an observer who foresaw Japan's eventual demise a year before its land-price bubble began to burst.

"The vulnerabilities in China today are very similar to the vulnerabilities in Japan," said Roy Smith, 76, who was a Goldman Sachs partner when he wrote a column saying Japan's rise as a financial hegemon was finished. "Nobody agrees with me. But they didn't agree with me in 1990, so at least I have one right."

Bad loans, overpriced stocks and a frothy property market are flashing danger for China's economy and putting pressure on a fragile financial system - similar to conditions that triggered Japan's fall, said Smith, a finance professor at New York University's Stern School of Business.

A further parallel is the burden of an ageing population, with mounting pension and health-care costs, he says.

While China probably will avoid prolonged Japan-style stagnation, a major crisis could expose weaknesses that are not apparent now, Smith said.

"Most people today are talking about China displacing the United States as the great power of the 21st century," he said. "My view is that it is more likely to end up like Japan - that is, the status of a former would-be superpower that isn't."

China surpassed Japan as the world's No2 economy by gross domestic product in 2010 after three decades of rapid growth. It is tipped by many forecasters eventually to overtake the US in output. By other measures, such as GDP per person, China is further behind the US.