Jump to content
House Price Crash Forum
zugzwang

China Risks Following Japan Into Economic Coma

Recommended Posts

The overtures that the Politburo and the PBoC have recently been making to the West suggest that the Chinese economy is in a lot more trouble than they're willing to admit publicly.

The idea of China already being in its economic twilight may not be as fanciful as it first appears.

http://uk.reuters.com/article/2013/07/29/uk-china-economy-japan-analysis-idUKBRE96S10S20130729

(Reuters) - After decades of emulating Japan's export-driven economic miracle, China appears in danger of following it into the same kind of economic coma that Japan is trying to wake up from 20 years later.

China is struggling to wean itself off a habit picked up from its more advanced neighbour: relying for growthlb_icon1.png on exports and credit-fuelled investment. That has left its economy lopsided, economists say, with massive over investment in property and industries rapidly losing their cost advantage, from mining and electronics to cars and textiles. Wages are rising, the return on investments falling.

With growth slipping, China's President Xi Jinping and Premier Li Keqiang seem determined to avoid a U.S.-style financial crisis, complete with widespread bankruptcies and job losses.

Preventing such a crisis though could embalm diseased sectors, stifling efforts to make growth more sustainable and instead create the kind of "zombie" banks and companies that sucked the life out of Japan's economy, economists say.

Add a population greying faster than Japan's did, and economists worry China may be attempting the impossible.

"There is a huge amount of denial. People think that demographics don't matter," said Chetan Ahya, chief Asia economist at Morgan Stanley in Hong Kong. "I'm worried about the deflationary risk."

Deflation may seem unlikely in an economy still growing at a 7.5 percent clip and where consumer prices are rising 2.7 percent a year. But economists warn that China in many ways resembles Japan in 1989, two years before its crash.

Like Japan, China relied on banks to funnel investment into export industries to create jobs and finance development. In return, interest rates were regulated to ensure banks a healthyicon1.png profit. Because the most profitable loans were those to the least-risky borrowers, banks concentrated their lending on big state-owned companies.

As Japan did in the 1980s, China tried to remedy this by partially liberalising the financial sector, creating new avenues of finance, a bond market and other non-bank lending. But as in Japan, this encouraged banks to lend more, not more wisely, helping fuel a property bubble. Things got worse in 2009, when China launched a 4 trillion yuan, credit-powered stimulus to ward off the global crisis.

While Japan saw credit expand from 127 percent of GDP to 176 percent between 1980 and 1990, China's credit rose from 105 percent in 2000 to 187 percent of GDP last year, JPMorgan Chase in Hong Kong says.

CREDIT RISKS

China's problem now is that each yuan of new investment is yielding a diminishing amount of new GDP. The slowdown is already creating signs of deflationary pressure: producer prices have been falling for 16 months and Morgan Stanley notes that real borrowing costs of 8.7 percent are outpacing the sector's growth.

One risk, therefore, is that China's reforms push growth low enough to trigger a wave of defaults that shakes the entire financial system.

"It's very important to slow down the growth of credit," said Grace Ng, senior China economist at J.P. Morgan in Hong Kong. "But if we slow and de-leverage too much you could have too much downside risk on the real economy."

The bigger risk, she and others caution, is that to avoid social unrest Beijing refuses to tolerate such pain, instead encouraging banks to keep troubled borrowers afloat by rolling over their loans like Japan's banks did in the 1990s, preventing them from lending to profitable new ventures that could revive growth.

Share this post


Link to post
Share on other sites

The overtures that the Politburo and the PBoC have recently been making to the West suggest that the Chinese economy is in a lot more trouble than they're willing to admit publicly.

The idea of China already being in its economic twilight may not be as fanciful as it first appears.

China is not going to go Japan.

Japan per capita income was 2nd highest in the world at 1990 ( I think) while Chinese is still a middle income country - plenty of room to grow. That doesn't preclude a hard landing of course, but they are not Japan.

Share this post


Link to post
Share on other sites

China is not going to go Japan.

Japan per capita income was 2nd highest in the world at 1990 ( I think) while Chinese is still a middle income country - plenty of room to grow. That doesn't preclude a hard landing of course, but they are not Japan.

yes its not even comparable.

there is huge capacity in china because GDP per capita is still only $6000.

you may not see unbroken high growth, after all the US had 20 recessions in the 20th century, an average of 1 recession every 5 years, but you would hardly say it has been an unsuccessful century for the US.

it would not suprise me if china is actually just running through a normal business cycle.

Edited by mfp123

Share this post


Link to post
Share on other sites

Excellent blog post I discovered today suggesting that China doesn't follow the Western Rentier model..

http://michael-hudson.com/2013/07/china-avoid-the-wests-debt-overhead-a-land-tax-is-needed-to-hold-down-housing-prices/

What industrial economies needed was tangible capital investment, not consumption by the idle rich. Throughout Europe and North America the great political fight of the 19th century was to tax away the landed aristocracy’s groundrent and the political privileges that protected it (most notably the aristocracy’s control of the upper house of parliaments, such as the House of (Land) Lords in Britain). The aim was to free industrial capitalism from the vestiges of feudalism, above all from the hereditary landlords whose ancestors had conquered the land and carved it up for themselves. The landlords argued, in effect, what Margaret Thatcher later would summarize in her phrase, “There Is No Alternative” (TINA) to the way things were.

But there was an alternative, of course. John Stuart Mill in Britain, Henry George in the United States and his followers such as Leo Tolstoy in Russia, and Sun Yat Sen in China campaigned to base the tax system on land and natural resources rather than industry and labor. Their argument was that leaving landlords to extract the rising flow of land rent “free” of taxes would oblige labor to pay rising prices to rent or buy housing. This would prevent landlord-ridden economies from competing in world markets (and even in their own market). This was still an epoch when industrial trade surpluses were needed to obtain monetary gold, which backed the money supply needed to circulate the flow of goods and services being produced. So a land tax was a key policy in achieving industrial surpluses. (Also needed was public infrastructure investment and an industrialization of commercial banking, discussed in greater detail below.)

Share this post


Link to post
Share on other sites

China has the ultimate get out which is to boost internal consumption.

The problem is that doing that involves not treating the general population like wage slaves and actually giving them enough money to consume, rather than keeping it in the hands of a select few millionaires/billionaires.

Seems to me like a bit more communism is in order.

Share this post


Link to post
Share on other sites

China is not going to go Japan.

Japan per capita income was 2nd highest in the world at 1990 ( I think) while Chinese is still a middle income country - plenty of room to grow. That doesn't preclude a hard landing of course, but they are not Japan.

It's far more complex, China already has a demographic problem far worse than Japan and still hasn't peaked. What happens is anyone's guess but the excess internal debt already built up is going to cause a banking crisis which China has avoided for a number of years. It will be interesting to see what losses are deemed acceptable for force upon it's populace.

Share this post


Link to post
Share on other sites

Analysis - China risks following Japan into economic coma

It's good to analyse and compare the economies of countries like China and Japan but how about a reuter headline of Will China follow the UK into economic coma.

Share this post


Link to post
Share on other sites

It's far more complex, China already has a demographic problem far worse than Japan and still hasn't peaked. What happens is anyone's guess but the excess internal debt already built up is going to cause a banking crisis which China has avoided for a number of years. It will be interesting to see what losses are deemed acceptable for force upon it's populace.

But then while the GDP may stagnant, real GDP per capita should rise as fewer people are competing for the fixed resources and also through increased automation.

Further, Chinese state did not make large promises about old age care and pensions (which are met via coercing of the working age population). China probably get away with a Cyprus style bail in I suppose..

Share this post


Link to post
Share on other sites

China has the ultimate get out which is to boost internal consumption.

You could say the same about Japan.

You could say the same about the UK by deleting the word consumption and replacing it with investment.

Share this post


Link to post
Share on other sites

One sided article. Which conveniently ignores the elephant inthe room - Japan's land and property bubble which sucked in money that could have been invested elsehwere, helped destroy its competitiveness and raised the wage requirements to feed itself.

If China does not deal with its own property bubble it could go the same way. If it resists the short/stupid route to wealth they will carry on going up the production chain engulfing suppliers elsehwere. As for demographics, with a well timed switch from labour intensive methods to automated manufacture they could smooth out their demographic bulge and maintain their manufacturing status.

Share this post


Link to post
Share on other sites
China has the ultimate get out which is to boost internal consumption.

The problem is that doing that involves not treating the general population like wage slaves and actually giving them enough money to consume, rather than keeping it in the hands of a select few millionaires/billionaires.

Seems to me like a bit more communism is in order.

It's quite weird that in the west we have free markets and democracy, while in China they have state controlled markets and single party rule-

Yet we seem to arrived at the same place- a tiny elite owns most of the wealth in both China and the west.

Edited by wonderpup

Share this post


Link to post
Share on other sites

But then while the GDP may stagnant, real GDP per capita should rise as fewer people are competing for the fixed resources and also through increased automation.

Further, Chinese state did not make large promises about old age care and pensions (which are met via coercing of the working age population). China probably get away with a Cyprus style bail in I suppose..

Isn't that why they save like mad and gamble leveraged on the stock market? And if you confiscate savings people will spend what internally?

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   217 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.