Source:
https://scmp.com/comment/opinion/article/3015005/china-must-draw-right-lessons-japans-trade-war-us-and-develop-its Comment
China must draw the right lessons from Japan’s trade war with the US, and develop its technology
- The Plaza Accord, which pushed up the yen, didn’t break the Japanese economy, which was in a good place to begin with. But China, which has a lower average income, can’t afford to make the same policy mistakes as Japan
President Xi Jinping is shown around the London offices of Huawei Technologies by founder Ren Zhengfei. In China’s power structure, more have a vested interest in keeping asset prices stable than in developing proprietary technologies. But the US trade war and ban on Huawei may have changed the dynamics somewhat. Photo: Reuters
The United States’ trade war with China reminds people of a similar episode between the US and Japan in the 1980s. Ironically, Japan’s ruling elite have been telling the Chinese in private for many years that the US would do the same to China one day. The current situation seems to vindicate the Japanese pessimism, which makes the lessons from Japan highly important to China’s strategic thinking. Unfortunately, the wrong lessons could be drawn.
Many Japanese experts believe the damage was caused by the US pushing up the yen and bursting Japan’s property bubble. There are a number of inaccuracies in this commonly held view. Japan’s property bubble was largely a consequence of its fixed exchange rate.
For decades, Japan’s exchange rate was fixed at or around 360 yen to the dollar, as it was building an export-led economy. When an economy grows its exports rapidly, its exchange rate should appreciate to reflect its rising competitiveness. When the exchange rate is fixed, the money supply will rise faster, instead, to reflect productivity gains.
The East Asian experience has shown that this always leads to a property bubble. Many experts, even in the US, thought then that Japan was different, that its crazy stock and land prices reflected a different economic model, not a crazy bubble.
The Plaza Accord, signed by Japan in 1985, almost doubled the yen’s value. In hindsight, the yen was fairly valued afterwards. Japan’s exports continued to boom. So did its property market. Japan’s asset bubbles eventually collapsed under their own weight: first the stock bubble in 1990 and then the property bubble in 1992.
The collapse of Japan is another inaccurate myth. Its property market did crash. Its economy didn’t – it merely stagnated. Its per capita GDP has remained around US$40,000, hardly a disaster by any standard. It has fallen behind the US, whose per capita gross domestic product is now around US$60,000. Then again, the US’ premium could be a bubble.
Japan’s big failure was not expanding its competitive scope. When the asset crash crippled the balance sheets of its banks and big companies, Japan went into defensive mode, hanging onto what it had. Consequently, it continues to lead in automobiles, robotics, precision parts and machinery, but it has largely missed the internet technology boom.
Stagnation hasn’t done Japan in because it started with a high level of average income and a bunch of world-beating industries. But for China, with an average income of around US$10,000 and a manufacturing-led export economy, a policy mistake like Japan’s could have catastrophic consequences. It might not be able to hang onto a US$10,000 average income.
Many experts in China consider property prices the key battleground in the rivalry with the US. According to them, keeping prices stable would make China strong.
Such a policy would lead to inflation and currency devaluation though – which local experts also consider a good thing because they believe it was the yen’s strength that hurt Japan. However, inflation and devaluation would be a recipe for political instability.
The right lesson to draw from Japan is not to delay structural reforms. When an asset bubble deflates, it could cripple big banks and companies. But if they are restructured quickly, the financial system can get back on its feet and allocate capital for competitive activities.
It is equally important to diversify the financial system away from state dominance. A government-controlled system is not good at identifying emerging competitive industries. This is why China has been better at catching up than making breakthroughs.
The US-China rivalry makes this weakness dangerous. When the US blocks access to its technologies, China must create its own. Your place in the global supply chain is only safe when the chain needs you as much as you need it.
In China’s power structure, more have a vested interest in keeping asset prices stable than in developing proprietary technologies. Otherwise, China wouldn’t be in its current predicament.
The US trade war and ban on Huawei may have changed the dynamics somewhat. But considering the credit support for the property market and the tolerance of the resulting inflation so far, those who wish to do the right thing for the Chinese economy might not prevail.
Andy Xie is an independent economist