China's Economy Is Repeating Japan's Mistakes

There are no conflicts and competitions in China and Japan, but the two countries have the same development pattern. If not careful, the Chinese economy may repeat the mistakes of Japan.

Postwar Japan Economics Recovery and China's recent economic growth depend on exports and cheap labor. The undervaluation of the exchange rate gives the exporters the competitive advantage, while the promotion of exports is at the expense of the people's household income and consumption.

In addition, both China and Japan encourage high savings, and then use savings to invest. Both countries have generated huge trade surpluses and invested in overseas assets based on US Treasury bonds to avoid the risk of currency appreciation and help overseas to acquire funds for their exports. The two countries also use domestic funds to support high investment to promote economic growth.

The Japanese music stopped abruptly in September 1985: the signing of the Plaza Accord forced the Japanese yen to appreciate, causing Japan's exports to decline and economic growth to slow down.

To restore growth, Japanese policymakers have launched a wave of credit driven investment to offset the impact of the yen's appreciation. This resulted in asset price bubbles and finally ended in collapse. Then Japan took advantage of government spending and low interest rates to avoid the collapse of economic activities, but the imbalance was increasing.

Since then, Japan has had huge fiscal deficits, high government debts and bloated central bank balance sheets. To a certain extent, this is to support the operation of the government and support asset prices.

　 Brewing banking crisis

Up to 1990, Japan They are still very successful - there has been only a brief interruption in the course of strong growth. Since 1990, after the collapse of the bubble economy, Japan has been stuck in economic stagnation for nearly 20 years.

China's objection to hasty revaluation of the renminbi stems from avoiding Japan's old path.

But China's response to the global financial crisis is much like Japan after the Plaza Accord. (the financial crisis has resulted in a sharp decline in China's exports and a slowdown in economic activity. )

China has launched a wave of investment through the rapid credit expansion of the state owned banking system instead of the government's support to promote economic growth.

Like Japan, China's banking system is vulnerable. China does not maintain a high level of growth through financial deficits, but through direct lending to designated projects through banks.

China relies on overvalued assets as a pledge and relies on infrastructure projects with insufficient cash flow to repay its debts, which means that many loans will not be repaid. These bad debts may trigger a banking crisis, and may also take away a large part of China's huge savings and income and weaken the growth potential of the economy.

In addition, Japan was much wealthier than China at the beginning of the crisis, so it has considerable advantages in coping with the economic slowdown. Japan also has a good educational system, strong innovation and scientific and technological strength, and diligent working style, which contribute to its adjustment. Japan has the world's leading manufacturing industry and the rich intellectual property rights of the electronics and heavy industry, which is also an advantage of Japan.

In contrast, China relies on cheap labor to assemble and produce products for export using imported raw materials. The current shortage of labour and rising wages are weakening their competitiveness. China's efforts in innovation and high-tech manufacturing are still at an early stage.

China's authorities admit that credit drives Investment The strategy leads to capital mismatch, low investment efficiency and state-owned banks' loss of loans.

　　 China's challenge

In recent years, the achievements of China have been more and more astonished. But if China fails to complete the necessary economic transformation, its astonishing success will ultimately be attributed to a sudden failure.

The question now is whether China can avoid becoming the next Japan.

China faces huge challenges in abandoning the investment led growth model. Relying on subsidies to expand production capacity and promote economic growth has become increasingly unworkable. The act of maintaining or adjusting the current strategy may lead to a greater than expected economic slowdown, which will have an impact on China's social and political stability.

The whole world thinks that China will maintain growth, but the growth rate will be slower than in recent years. This view is based on what the world economy needs, not what it is. As the novelist C.S. C.S. (C.S. Lewis) said, "finding the truth, finding comfort may be the last thing, finding comfort, finding no comfort at all, and finding the truth. Only the illusory bubbles and wishful thinking end up in despair."