. . . on the subject of whether China will wind up like Japan. The Economist probably wins, through sheer preponderance of graphs. Here is Wolf’s point:
Japan’s experience also has a lesson for quite a different economy. It indicates that when very fast growth begins to slow in a catch-up economy with very high corporate savings and comparably high fixed investment, demand may well prove extremely difficult to manage. This is particularly true if the deliberate promotion of credit growth and asset price bubbles has been part of the mechanism used to sustain demand. And who needs to learn this vital lesson now? The answer is: China.
A longer piece from the Economist takes this apart, to some extent. Most stand out facts:
- “Chinese homes carry much less debt than Japanese properties did 20 years ago. One-quarter of Chinese buyers pay cash. The average mortgage covers only about half of a property’s value. Owner-occupiers must make a minimum deposit of 20%, investors one of 40%. Chinese households’ total debt stands at only 35% of their disposable income, compared with 130% in Japan in 1990.”
- “It is hard to argue that China has added too much to its capital stock when, per person, it has only about 5% of what America or Japan has”
- “Predictions that China is heading for a prolonged Japanese-style slump ignore big differences between China today and Japan in the late 1980s. Japan was already a mature, developed economy, with a GDP per person close to that of America. China is still a poor, developing country, whose GDP per person is less than one-tenth of America’s or Japan’s.”
Japan had caught America by the time its slump began; it was in a position of genuinely not having an obvious source of domestic demand. It had the stuff it needed (and then ran into a monster asset price collapse)
But this last point – about the relative low level of China – is also, IMHO, a point of concern for China. The Economist makes a biggish deal out of this graph:
which is a classic catch-up graph; the lower you start, the more room there is to grow. It makes sense (Solow Growth Model); each unit of capital becomes less productive until you hit full development. China is a long way short of that point.
But China has about a fifth of the world’s population, and is already the world’s leading exporter, as of around now (overtaking Germany). If it wants to grow like this, and reach, ooh, 40% of the US level, it will have to export virtually everything. There are limits, when you are that big. A small country like Sweden can grow through exports forever. A biggish one like Japan hits political and economic limits sooner. A promising-to-be-big-one, like China, will have to rebalance some time, if it is not to end up stalled way short of the US. They need to work out how to run off their own consumers. This may be uncomfortable.
Particularly when the rest of us are planning to export our way to growth (see David Smith on this for the UK). We all want to make the Green things that will supposedly power our economy. Those limits may be closer than China realises
*but as Paul points out, the environment is not the economy). Furthermore, if doing green things means doing expensive, unproductive things, then you hit the country’s productivity, which means less growth and wealth in the long term (see the Economist on wind farms). Of course, the Tories may get away from such unpleasant tradeoffs by denying that Climate Change is a problem at all. I used to think this was idle, LibCon slander, now reading this FT story I believe it is true; Tories don’t take climate change seriously.