Will China fall flat on its face just like Japan?

Godzilla (left) and Chinese dragon

In the late 80s, Japan was the Godzilla economy.

Its output had grown 50-fold in dollar terms in the space of just over a generation, and Japan had seemingly overtaken the US as the most hi-tech nation. For many observers it was just a matter of a decade or so before Japan would become the world's biggest economy and its third superpower.

But, of course, things didn't turn out that way. Instead, in 1990 Japan's stock market and property market both crashed spectacularly, leaving two decades (and counting) of economic stagnation in their wake.

The more recent giddy rise of China's dragon economy is chillingly familiar.

And many sceptical commentators have drawn the analogy with Japan, saying it is destined for a fall. But is this fair?

We have put the two head-to-head, so you can decide:

Japan in 1990 China in 2012
Crowds await a bullet train at Ueno station in Tokyo in 1988 Shanghai Pudong skyline

Population:

125 million

or 2.3% of the planet

1,344 million

or 19% of the planet

Economic size:

$3.1 trillion

or 54% of US GDP in 1990

$7.3 trillion

or 48% of US GDP

Average growth rate:

6.5% over the previous 35 years

9.9% over the previous 35 years

Bubble economy

The Tokyo Stock Exchange at the bottom of the market crash in 1992 The 1990-92 crash - a terrifying ordeal for Tokyo's traders Performers at the opening ceremony to the 2008 Beijing Olympics China hosted the glitziest Olympics of all time at Beijing in 2008

Hubris:

  • Japanese electronics firms produced ever smaller TVs in the 80s, to demonstrate their technological prowess
  • A 1988 Time Magazine article "Japan from Superrich to Superpower" predicted a renewed Pacific challenge to the US
  • Sony's 1989 takeover of Hollywood's Columbia Pictures added to US fears that Japan was buying up the whole of California
  • The world's biggest indoor waterpark was built in Miyazaki, including fake volcano and the world's biggest retractable roof

Stock market:

Nikkei 225

When Japan's five-year-long stock market bubble burst, it wiped out the savings of many ordinary Japanese investors.

What's more, many companies had bought up rivals at the top of the bubble, paying hugely overvalued prices with borrowed money.

SSE Composite

The Chinese two-year-long stock market bubble burst just before the 2008 global financial crisis.

It was shorter lived than Japan's bubble, and fewer people invested in it, and seems to have done less harm to companies' and investors' wealth.

Property:

Japan urban residential land price index

Falling property prices have devastated the many businesses and ordinary Japanese homeowners who bought property at the top of the boom with borrowed money.

Data about the Chinese property market is patchy.

Land prices in Beijing more than tripled between 2003 and 2011, while in Shanghai they more than quadrupled, according to one recent study.

In the central Chinese boomtown of Chongqing - home to the recently disgraced Communist Party boss Bo Xilai - they rose almost seven-fold.

The price rises look unsustainable, compared to the incomes people have to pay for them or the rent that can be earned on the property.

Housing construction has been rapid, especially since the government sought to stimulate economic growth in late 2008.

There are anecdotes of entire new residential developments sitting unoccupied.

From 2011, property prices and construction appeared to enter a nasty downturn, although the most recent data suggests the market may have bottomed out.

Few Chinese people take on big mortgages to buy their homes.

However, property developers are heavy borrowers, and local governments also rely on land sales to raise money, and both would be badly affected by a sustained slump in the property market.

Infrastructure:

Government spending on infrastructure took off after the bursting of the property and stock market bubbles, to stave off economic depression.

It created many wasted projects, popularly dubbed "bridges to nowhere".

Among Japan's engineering feats are:

  • The world's longest transport tunnel (the 54km Seikan railway tunnel opened in 1988) and the longest suspension bridge (the 3.9km-long Akashi Kaikyo Bridge built in 1998)
  • The bullet train, first inaugurated in 1959, and significantly expanded since the 1980s
  • Kansai International Airport built in the early 90s on an artificial island in Osaka Bay that promptly began to sink
  • The $2bn Isahaya Bay dyke, built in the 1990s, whose floodgates are now set to be opened, inundating the farmland that the dyke had reclaimed from the sea, because the dyke is causing serious damage to local fisheries

China's government significantly increased its infrastructure spending in response to the 2008 global financial crisis.

It has built:

  • The three longest sea-bridges in the world, and six of the 10 largest container ports
  • 10,000km of new high speed rail track from 2008 to 2011 (about five times the entire TGV network in France), much of which was built by corrupt officials in too much of a rush leading to a notorious rail crash near Wenzhou in 2011
  • 85,000km of motorways as of 2011, significantly more than the entire US freeway network
  • The most expensive Olympics venues ever, including Beijing's Bird's Nest Stadium, which is now used as a Segway racing track and sits largely unused

Imbalances

Japanese man browses computers for sale in a Tokyo department store in 1992 Japan could have done with a bit less looking and a bit more spending Chinese container ship The world's biggest manufacturer and its biggest exporter

Exports:

Japan's current account surplus - how much more it earns from the rest of the world than it spends in return - peaked at 4.3% of the country's total income in 1987.

Japan's export success in the 80s caused consternation in the West, leading to the 1985 Plaza Accord, in which Japan (and many other countries) agreed to let their currencies strengthen against the dollar.

But despite a less competitive exchange rate, Japan's overreliance on exports persisted, and its surplus again peaked at 4.8% of GDP in 2008.

China's current account surplus peaked at a whopping 10.6% of its economic output in 2008.

The country was accused, especially by the US, of fixing the yuan against the dollar at an unfairly cheap exchange rate.

China has since allowed its currency to rise 9%, and rapidly rising Chinese wages have further undercut its competitiveness.

The surplus has since narrowed to about 3% of output.

However, much of this is due to weak Western demand for Chinese exports, and bigger Chinese imports of materials needed for its recent construction boom.

Consumer spending:

Consumers contributed 53% of total spending in the Japanese economy in 1990 - compared with about 70% in the West.

Spending on investment (new apartment blocks, bridges, education and so on) by contrast contributed 32% of all spending in Japan.

When the investment boom came to an abrupt end, Japan needed its citizens to step up and increase their own spending quickly to make up the difference.

Only 34% of spending in the Chinese economy is by ordinary people on consumer goods and services.

Some 48% of spending goes on investment.

In other words, the core economic imbalance in China today appears considerably bigger than in Japan two decades ago.

Some economists think this means China will have to pull off a historically unprecedented consumer spending boom, if it is to reorient its economy while avoiding a prolonged Japanese-style slump.

Savings habit:

Japanese households typically saved 10% of their income in 1990.

The government needed them to save less and spend more.

But it took 10 years for that savings rate to fall back to the much lower levels typical in the West.

In the meantime, Japan's economy stagnated.

Chinese households save 25% of their take-home pay.

The high savings rate is in part due to the need for most ordinary Chinese to build a nest egg to pay for their children's education, and to cover medical bills particularly for elderly and retiring family members.

Constraints

Osaka Kansai International Airport Osaka's Kansai International Airport at the time it was still sinking Elderly Chinese women China's one-child policy is also known as the "four grandparent policy"

Global economy:

After a slowdown in the early 90s, the world economy enjoyed robust growth for over a decade, which helped Japanese exporters to stay afloat.

China faces a much harsher economic environment.

Its main export markets - the US, Europe and Japan - remain depressed, and there is strong political opposition in those countries (especially the US) to China continuing its current account surpluses.

Bad debt:

Japan's industries and banking sector became riddled with unrepayable debts.

Loans had been taken on to buy up land, property and other companies at hugely overvalued prices during the bubble years.

Between 1992 and 2005 Japanese banks collectively wrote off loans equal to 19% of Japan's annual economic output.

In its attempts to keep the country's economy afloat, the government has run up debts equal to 230% of GDP.

The government's attempts to maintain growth after 2008 saw the state-owned banks rapidly increase their lending.

In the 12 months following October 2008 alone, the banks created $1.5tn of new loans, equal to 30% of China's annual economic output.

China's financial system has also been accused of harbouring many hidden debts.

For example, in 2011, it emerged that local governments had taken on debts of up to $2.2tn, much of them hidden.

Growth potential:

In 1990 Japan was a highly developed country.

The average Japanese citizen's economic output was 83% of the average American's.

When the government tried to support the economy in the 90s by investing in infrastructure, it faced the problem that nearly all the infrastructure that the country actually needed had already been built.

China is still a very poor country.

Average output per citizen is just 17% of the US average.

Half the population still lives off the land, and has yet to migrate to the cities where they can be put to more productive work in industry.

So there may still be great scope for China to grow its way out of its current problems.

Aging population:

The number of productive Japanese workers - aged 15 to 65 - peaked in the early 90s.

Before the peak, the population grew steadily, while those in work had few children or retired parents to care for.

Older workers also had a strong incentive to save for their retirement, helping to finance the country's investment boom and market bubbles.

Since the peak, the number of retired workers that the economy must support has grown steadily, from 12% to 23% of the population.

The total population itself has also peaked in 2010, and is expected to decline for many years.

Thanks partly to China's one-child policy, introduced in 1978, China has also enjoyed a 30-year bulge in the proportion of productive workers, with few children or parents to care for.

However, China is now reaching the same demographic turning point that Japan did in 1990.

Japanese officials have warned that China may face similar problems - a stagnating population, increasing numbers of elderly citizens to care for, and a possible crisis if ageing citizens are unable to pay for their retirements.

Government:

Japan is a democracy, but one that has been dominated by a single party for most of its post-war history.

For years, the Liberal Democratic Party maintained its monopoly by doling out money to keep party factions and their voters happy.

Following the 1990 bust, the government took the same approach to its big infrastructure projects - new bridges and schools were built wherever was most politically convenient.

As voters became increasingly frustrated with the economy's stagnation, the LDP's monopoly has given way to a genuinely competitive two-party system.

But even so, it was not until 2009 that the opposition finally won a clear election victory for the first time.

China is a one-party state.

The Communist Party does not tolerate any opposition or criticism.

The lack of any checks or balances has led to endemic corruption and widespread public resentment of the privileges enjoyed by those in power.

Income inequality in China is extreme - perhaps as high as in the US.

The power of the central government is also limited.

It is run on a collegial basis by a standing committee that represents large "vested interests" - powerful Party families and factions who control major state-owned assets, according to a US embassy cable leaked by Wikileaks.

The huge size of the Chinese state and the general lack of transparency also means that the central government also has only limited control over what provincial and local government officials get up to.

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