Is China Turning Japanese?

Michael Pettis – Foreign Policy

An insightful post on the potential parallels between China’s economic emergence and Japan’s recent history by Michael Pettis. An excerpt:
“One option might be for Beijing to engineer a huge shift of state wealth to the household sector through, say, a massive privatization program. This could drive up consumption significantly by boosting household wealth, but the likelihood of mass privatization is slim, given the political realities in China.
Another option, and ultimately the only sustainable path forward, would involve reversing the subsidies that generated such furious growth. Wage growth must at least keep pace with productivity growth; interest rates must rise substantially; and the currency must be revalued. But if any of these happen too quickly, we could expect a surge in bankruptcies — as old businesses struggle to survive without familiar subsidies.
Unfortunately, the longer China waits to make the transition from this model of growth, the more difficult the transition will be. Forcing banks to fund projects at artificially low interest rates inevitably raises non-performing loans, and these eventually become government debt. The longer China waits, the more debt there will be and the more dependent growth will be on the subsidies.
“…For a worrying case study, one need only look to Japan, which grew very rapidly thanks largely to very high rates of investment forced through the banking system. For a long time the problem of misallocated investment — which was whispered about in Tokyo but not taken too seriously — didn’t seem to matter. Everyone “knew” that Japan’s leaders could manage a transition easily. After all, they were extremely smart, with a deep knowledge of the very special circumstances that made Japan unique, with real control over the economy, with a strong grasp of history and penchant for long-term thinking, and most of all with a clear understanding of what was needed to fix Japan’s problems. Sound familiar?…”
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