Is China the new Japan?
Everyone with even a remote interest in international business cannot have failed to notice China’s ever growing role in the global marketplace. China has through the last 10-20 years become the dominant center for production of goods ranging from textiles to electronic goods and industrial-use products such as steel and chemicals. As a result, China is on everybody’s lips and an ever increasing number of foreign firms are injecting capital into China in form of investments in Chinese companies, joint ventures and so on. Anyone familiar with East Asian economic history, however, cannot fail to notice the striking similarity of China’s development the last 20 years and Japan’s rise to the status of economic superpower in the 70′s and 80′s.
While there are many differences in both business culture and the general societal framework and method of government between the two counties, their economic growth and rise to fame share many similarities as well. While Japan is a democracy in all respects, the de facto one-party rule all the way from the end of WWII up until 2009 puts the political decision making during that time much more on par with a one-party state such as China, and the growth strategies implemented by the two governments share many traits as well:
When Japan’s growth strategy was promulgated during the 50′s, certain industries, through access to easy capital and initial protection, were singled out to become globally competitive, while other industries remained heavily subsidized and were destined to serve only the domestic market. This way of thinking can be found as well in Ch
ina, with the notion of a number of ‘National champions’, who, with government backing, should be nutured to an extent, where they could compete internationally.
The heavily protected markets of China, both in terms of trade barriers and restrictions to capital in- and outflows along with the stringent exchange rate control also resemble Japan under the Bretton- Woods era, where restrictions on capital markets along with tariffs and trade barriers where much more restricted than today.
The inevitable question is then, whether or not China is in danger of suffering from an asset bubble of the magnitude that Japan did in the 1990′s and subsequently suffer from the same type of prolonged economic muddle that Japan is still suffering from.
In order to make such guesses, one must look to the reason of the Japanese asset bubble of ’91. According to Cargill & Sakamoto, the Japanese bubble was a result of incomplete and flawed financial liberalization, failure to dispose of elements from the old financial regime and lack of transparency for proper risk monitoring. Japan’s liberalization of markets came as a result of international pressure and pressure from domestic financial institutions, but as the intention never was to depart from the old notion of a ‘state-led economy’, the liberalization was only partly undertaken and created discrepancies within the system. The government still erroneously considered close relationship between the Ministry of Finance, the banks and the keirestsu groups an adequate system for risk monitoring, and the policy of ‘no failures of financial institutions and markets’ remained firmly in place, despite the Japanese Deposit Ensurance Corporation lacking reserves to secure deposits even if one regional bank should fail.
If one compares to China, there is no doubt as to China likewise being a ‘state-led’ economy. The Chinese economy is undoubtedly under immense international pressure to liberalize financial markets and small steps has been taken. As of late, there has been an opening in financial markets allowing foreign institutions to trade yuan on a very limited basis. While this is a small step, it could indicate that China is giving in to demand for liberalization against their will, leading to a flawed liberalization process. China also seem to rely heavily on close relationships with the big firms and banks, as they are either state-owned or subject to frequent government control. While this system with a party representative in the management seems more rigorous than it’s Japanese counterpart, it is questionable how different it is from the Japanese amakudari system, where government officials entered board of directions of big companies after retirement. China is ruled by a communist party, and since communism in its essence is anti-market, there is no doubt that the skepticism of free competition is every bit as strong amongst Chinese government officials as they are in Japan, if not even more so.
Only time will tell if China shall experience an asset bubble of the magnitude of the one in Japan. There has been rumors of lesser real estate bubbles rising in major Chinese city centers and it indeed seems like many of the same factors are in place. However, one can hope that the Chinese leaders will take measures to stop such a bubble in time, as China’s size and share of worldwide production in case of a full-blown asset bubble could create unimaginable consequences for the world economy.
