China Looks a Lot Like Japan Did in the 1980s
For clues as to what lies ahead, look back to what happened to Japan after its era of supercharged growth in the 1980s.
The future may not be so bright for Chinese President Xi Jinping’s economy.
Photographer: Greg Baker/AFP via Getty Images
How weak is China’s economy? A raft of data in recent weeks suggest it has slowed sharply. It may not even be growing at all, given the unreliable nature of China’s domestic statistics. Most observers say the slowdown is due to the government’s attempt to stamp out Covid-19 and, more importantly, the woes of the country’s highly leveraged real-estate sector. Actually, the property sector’s travails are more a symptom than a cause of China’s problems. The nation’s economic model is probably broken, much like Japan’s was three decades before — and for remarkably similar reasons.
I suspect China will avoid an all-out crisis, but economic growth will limp along at next to nothing or worse. Like those of other North East Asian countries, China’s growth model has relied heavily on the one pursued by Japan after World War II. As well as five-year economic plans, the Japanese banking system was corralled into lending to favored sectors. The whole system was, in essence, designed to strip out and socialize credit risk, thereby making borrowing cheaper for the economy as a whole. Lending was collateralized, generally with property. Companies aimed for market share rather than profitability. The flip side of cheap capital was poor returns for investors. Regulators were able to pull off this trick via heavy restrictions on where investors could put their money.