China economy

China’s challenges are not the same as Japan’s – they’re worse

Robert Boxwell says despite some similarities – slowing economies, bad debts and bad demographics – today’s China and the Japan of the 1990s differ in important ways

PUBLISHED : Sunday, 17 July, 2016, 12:33pm
UPDATED : Sunday, 17 July, 2016, 7:23pm

Open a newspaper nowadays and you’re bound to find comparisons of China with early-1990s Japan: growth slowing, monetary stimulus leading to bad debts and financial bubbles, demographics heading inexorably towards a population that won’t match the required long-term repairs. The similarities seem apt, but two salient differences also exist. One could make it harder for China to sustain export growth; the other makes the need for a solution more urgent than it was in Japan. Both aggravate the challenges facing China’s leaders.

Post-war Japanese companies competed largely on quality and had built global brands that consumers sought by the time Japan slowed. Chinese companies compete primarily on cost; the attractiveness of their products are often largely based on lower prices. And when Japan’s economy stalled, its homogeneous society was better suited, culturally and economically, to “keep pedalling”, as they said, even if they weren’t making progress into the winds of a new economic reality. The same can hardly be said for mainland China, a diverse mix of cultures, economic orthodoxies, and haves and have-nots, all not long removed from decades of civil strife. In fact, one of the biggest challenges facing China seems to be getting top leaders to agree on what to do.

Japan’s post-war recovery was driven at first by a combination of cheap exports, helped by a cheap yen, and a focus on heavy industries like energy, steel, shipbuilding and chemicals. But quality was always present. In 1950, an American, William Deming, brought his quality control expertise to Japan, where leaders adopted it wholesale and initiated a national quality award, named for him, in 1951. By the ’80s, Japan’s manufacturers were famous globally for their innovative, high-quality products. They still are.

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Take automobiles. While Detroit was tweaking the size of fins on Cadillacs, Japanese engineers were lowering production costs of vehicles that were reliable, pleasing to the senses and economical. Distribution complemented product. American consumers were delighted to learn they could buy a car without haggling and have it serviced without being cheated. Japanese autos’ US market share rose steadily, even as the yen went from 300-something to 80-something per dollar. Americans wanted their Toyotas and Hondas. They also wanted their Sonys, Panasonics and Nikons.

China Inc hasn’t quite captured Western imagination the same way

When a political backlash hit from Japan’s trade surplus, Japanese auto manufacturers moved assembly to the US, answering the complaint they were taking American jobs by making American jobs, transferring technology along the way. Businesses from all over made their way to study Japanese methods at the first plant, a 1984 Toyota-GM joint venture at a shuttered GM factory in Fremont, California. Business schools added quality to their curricula. Books flooded bookstores. President Ronald Reagan announced a national quality award in 1987, helping institutionalise a movement that swept over American business. I spent several years on the front lines of this. The benefits to American industry proved real and durable.

China Inc hasn’t quite captured Western imagination the same way. While the perception of Japanese products progressed from “cheap” to “wow!” over a couple of decades, the perception of Chinese products progressed from “cheap” to “what happened to my job?” Chinese shoppers coming home from Japan and Hong Kong laden with everything from rice cookers to baby formula puncture the perception about quality. Even basics like food safety and pharmaceuticals often don’t meet minimum standards.

Because much of China’s “miracle” came simply from mobilising a massive low-cost labour force, moving production to the West won’t help. And there’s not only no movement among US businesses to study Chinese businesses, there’s a sense that they might find their own tech, stolen, if they did. Beijing’s recent propensity towards confrontational talk won’t help either. Japan was a staunch ally through the cold war. Beijing talks like another cold war is coming.

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But Beijing has to do something soon to revive the Chinese Dream. While 25 years after the economy stalled, life is still pretty good in rich Japan, the same can’t be said about China, whose economy is just about a fifth of Japan’s on a per-capita basis. The poor in Japan don’t have electronic toilet seats; the poor in China don’t have toilets. The ratio of management pay to frontline worker pay in Japan’s egalitarian society presents no focal point for grievance. But China, the world’s largest socialist country, somehow now has the most billionaires, while migrant workers work in conditions that would never be acceptable in developed economies. Approximately 70 million Chinese live a short walk from destitution.

Japan was a staunch ally through the cold war. Beijing talks like another cold war is coming

In short, a cultural harmony that has helped the Japanese endure their stagnation doesn’t exist in China. And while the Japanese can use the ballot box to express dissatisfaction, mainland Chinese can’t even talk about dissatisfaction.

Beijing’s moves have been jumbled. Talk of a “new” economy of consumption and services makes a nice sound bite, but probably just means a microcosm of globalisation within China’s borders. Increasing productivity is usually good, but it isn’t the answer in China’s state-owned heavy industries with excess capacity. The world hardly needs more steel or cement from China, even if it is produced more efficiently. And restructuring this, swapping that, telling shareholders they can’t sell, and reminding everyone to think positive thoughts hardly seem like technocratic solutions.

Chinese leaders’ confusion was on stark display recently, when a warning by an “authoritative figure” about increased debt was followed by the announcement of 5 trillion yuan (HK$5.8 trillion) more in infrastructure spending. This was seemingly cleared up by the publication of the text of a 20,000-word speech given by President Xi Jinping (習近平), explaining that what people thought he meant last year by “supply-side structural reform” wasn’t really what he meant. The upshot of the clarification of this confusion is that President Xi is in charge of the economy now.

Living in Asia for the past 20 years, including several in Hong Kong and Japan, I haven’t come across many people who aren’t pulling for the people of China. Economies around the region are heavily tied to China’s growth and millions of families, including mine, are tied to the people themselves. Even if you’re not a fan of Beijing, you wish them success because so much is riding on their ability to fix things. But “keep pedalling” probably isn’t the right exhortation. “Get on with it” seems more like it, assuming they can figure out what “it” is. China is in much worse shape than Japan was. This has little to do with debt policies or a hopeful conversion to a new consumer society and everything to do with half a billion Chinese wondering what’s happening to their share of the Chinese Dream.

Robert Boxwell is director of the consultancy Opera Advisors