Twenty years ago, Japan was like China today. Japan had the world’s most rapidly growing economy. Japan was exporting large amounts of products to the US and the rest of the world. The US complained that Japan’s markets were closed to foreign companies, Japan had stolen American technology, and the value of the yen was too low. Many experts though that Japan’s economy would continue to grow as the US economy declined.
But that did not happen. Japan’s over priced housing market collapsed and Japan’s economy stalled. The US economy recovered and grew strong compared to Japan. Japan’s economic model was successful for 40 years but times changed. Japan’s economic model quickly broke down and Japan is still trying to recover.
The lesson for China may be the same. There are many similarities between China today and Japan 20 years ago. Closed markets, undervalued Yuan, big US trade deficit are all similar. China’s economic model has been very successful for the last 30 years but times are changing. Will China’s economic model survive these changing times? This does not mean that China’s economic model is wrong but it leaves the question of how much longer the model will work.
China is changing rapidly. Low cost competitors like Vietnam are taking manufacturing jobs from China. The world recession has reduced China’s exports and this will likely continue for some time.
China’s debt is also a big problem. China has borrowed heavily from Chinese banks to build roads, trains and expensive housing. Many of these investments are losing money just to keep Chinese people employed. Chinese people save a lot of their income yet receive little return on their savings. Inflation would have a serious effect on Chinese savings. Government investments in housing encourage rising prices. If the value of Chinese people’s savings goes down due to inflation and the cost of housing uses up people’s incomes, there is less money to expand the domestic economy and reduce China’s dependence on exports.
China’s economic model is under stress and many question whether the government can continue the high rate of economic growth. The lessons of Japan’s economic problems may help the Chinese government avoid Japan’s mistakes.
