11 ms·

Zombies once destroyed Japan's economy, now they're infecting China's

196 points by throwaway2048 13y ago

nabla9 13y ago
This is well written argument, but there is one big difference between China now and Japan then. China is still going through urbanization in unprecedented scale. About half of the Chinese live in cities now. By 2030, cities will be home to 70 per cent of China’s population and generate 75 per cent of its GDP. There will be 200 million Chinese moving into cities in next few decades. China can be close to where Japan is now in the 2040 banking crisis. For now, even massive crisis just delays the inevitable increase in demand that eats away all mistakes in fiscal and monetary policy. http://insights.som.yale.edu/insights/what-should-we-understand-about-urbanization-china http://insights.som.yale.edu/insights/what-should-we-underst... http://www.cn.undp.org/content/china/en/home/presscenter/pressreleases/2013/08/unprecedented-pace-of-urbanization-presents-challenges-and-oppor/ http://www.cn.undp.org/content/china/en/home/presscenter/pre... http://www.cn.undp.org/content/china/en/home/presscenter/pressreleases/2013/08/unprecedented-pace-of-urbanization-presents-challenges-and-oppor/ http://www.cn.undp.org/content/china/en/home/presscenter/pre...
- npalli 13y ago
  Yes, the urbanization argument for this time it's different. There is bound to be massive urbanization in China. However what it ignores is the price of housing the newly urbanized can afford. Eventually it will have to settle to the economic value they add in the global marketplace. The price of housing at many of these new ghost cities is already close to the level of heavily developed western cities. So that leaves two possibilities 1. Every newly urbanized Chinese person moving from the country side will generate the economic potential of a Chicago or London person. So another 200 million investment bankers I suppose. 2. The property values of these ghost cities will dramatically deflate to measure up to the economic value added by the newly urbanized. Which means the value of these massive properties needs to written down by the banks. Most people making the urbanization argument assume that option 1 will invariably occur. When in fact it is overwhelming likely that option 2 will occur looking at the massive number of people being urbanized and the massive deflationary pressure on every occupation. Urbanization per se will not cure the ghost cities problem. You have to look at the prices too.
  - nabla9 13y ago
    There will be #2, but coming banking crisis will be temporary, not decades long zombie slump like in already developed and urbanized Japan.
    - npalli 13y ago
      The situation in Japan developed because the real estate got disconnected from its economic potential by a large margin. At the peak of the bubble in the mid-80’s the land value of just the imperial palace in Tokyo was worth more than the entire land value of California. A million times ratio!!. There is no amount of urbanization that could have solved this problem for you because the underlying economics did not make sense. In the end, I’m not sure the Japanese had a choice, maybe they could have let some banks fail earlier but the size of the bubble was so massive that immediate deflation would have triggered a Lehmann like moment for them. In fact, if Option 2 is correct I’m pretty sure the Chinese leadership has no other option but to deflate the economic gap with a zombie like situation for decades. If you think they will let a Lehmann-like moment to happen and quickly reset prices back to the ‘right’ level you are mistaken. It would put the financial system at risk; the entire legitimacy of the CCP in danger and that would mean blood on the streets. They will keep shutting down the smaller non-state banks and keep rolling the loans of the bigger state banks and gradually write off the debt over several years. There is definitely no shock therapy of short-term pain that makes sense.
      - justincormack 13y ago
        The land value of Beijing is now 60% of US GDP, the same ratio Tokyo was at at its peak (its a somewhat odd measure, but hey).
  - Symmetry 13y ago
    Where are you getting your information on the price of housing in China? Looking up some statistics on line I found an average of $1,742/m in China versus $15,284/m in the US. It might be that there are some massively overpriced developments, but they don't seem to be moving aggregate prices much so they can't be that big a deal on an economy-wide basis. But in the end prices are simply an abstraction over the physical economy. China has an awful lot of families crammed into a single room, so there's clearly a reasonable case for building lots more housing. Like all abstractions they can screw things up and deflation can certainly cause problems, but not when it's much smaller than growth and Chinese inflation is right now comfortably over 4%.
- oscargrouch 13y ago
  The author of the article only forgot a little detail.. the population size and the urbanization phenomena... Only when this stop to happen, we will be able to see the real size of the china economy.. not to mention the "last drop", when they will push efficiency into the engines, to get a little more expansion.. US and Japan already did both.. and til someone discover a new economical path.. nowhere to go for them.. So only china and the emergents will be able to grow right now, under the old economical gears.. (not to mention that nobody is making more babies anyway to fill the void)
execonomist 13y ago
I'm not too impressed by this argument. You could easily compare China with South Korea or Taiwan and come to the opposite conclusion. This is why you should never trust an argument that relies on two data points. In fact, don't trust macroeconomists in general: individual preferences cannot be aggregated, at least not with our present mathematical tools. As a result, micro-founded macro models (99% of them) are complete nonsense: that's why Caltech doesn't even bother teaching macro to its PhD students anymore. It also explains why DSGE models have no predictive power whatsoever. Rant over.
- lisptime 13y ago
  indeed http://econlog.econlib.org/archives/2008/03/junk_macroecono_1.html http://econlog.econlib.org/archives/2008/03/junk_macroecono_...
- magoghm 13y ago
  "that's why Caltech doesn't even bother teaching macro to its PhD students anymore" this seems interesting. Any source for that?
- deleted 13y ago
  [deleted]
jusben1369 13y ago
I read the Quartz regularly and enjoy much of what they write. However, they do appear to have an obsession with China and are nearly all doom and gloom. Maybe that's because they're right and China is a house of cards about to fall but I've found I have to take everything they write on China with a pinch of salt as they write 1 or 2 articles per week on how screwed China is.
- AJ007 13y ago
  Is Quartz biased against China or are other news organizations restricting their reporting in order to ensure maximum access to the Chinese market? http://www.nytimes.com/2014/03/21/business/international/bloomberg-should-have-rethought-articles-on-china-chairman-says.html http://www.nytimes.com/2014/03/21/business/international/blo...
aarkling 13y ago
Even if it starts stagnating it will pass the US in total GDP. China has 10x the population of Japan. Not that it matters. The average Chinese will still be a lot poorer than the average American.
- hga 13y ago
  However, thanks to the PRC's 1979 "one-child policy", they look to be the first country to skip from the "industrializing" stage which generally has reasonable population growth (weasel wording since Japan's fertility started declining in 1974 and has yet to stop), to the sort of modern social welfare state we see in the West with too few producers trying to support too many dependents. Except of course they don't have much of a welfare state. It's sometimes called the 4-2-1 problem: 4 grandparents produced 2 parents who produced 1 child. It's one of the reasons for their very high savings rates, even with negative real returns. And like Japan, the retirees are in for unpleasant times when they try to turn paper wealth into real consumption.
tokenadult 13y ago
First I read all the comments already posted here. Then I read the fine article from beginning to end. This is a good article, and well worth a read. I am old enough to remember the kind of reporting that was done about Japan in the English-language press back when the book Japan as Number One[1] had just been published. Japan used to look unstoppable in the same way that China looks world-beating to many people now. But Japan's "lost decade" of minimal economic growth and declining soft power in the world has lasted a lot longer than just one decade. Japan in the 1980s already had significant advantages that China still lacks in the 2010s. First of all, it had a political system with actual elections that weren't wholly rigged. (The political system in Japan has opened up more since then, but even thirty years ago it was well ahead of where China's political system is now.) Second, Japan had a free press and unfettered access to foreign reporters and foreign news media for decades by the 1980s. China still doesn't have either of those information channels for correcting problems in sufficient degree. Third, although primary education in China is quite good in urban areas, good primary education in China is still not as pervasive nationwide as it was in Japan by the 1980s. That's illustrated in part by how few people in China (compared to Japan) are even conversant in the national language. Barely more than half the population is conversant in standard Mandarin Chinese.[2] China is at risk. The "socialism with Chinese characteristics" (中国特色社会主义) economic policy it officially now has cannot be sustained. It looks like it has been growing rapidly in recent years for some of the same reasons that Spain looked like it was growing rapidly a decade ago--a housing bubble. The inevitable correction that has to happen in the investment markets in China may not bring about a recession, but it can't help but bring about a change of investment priorities that may make China look less amazing for a while. China will really rise to world prominence when its common people enjoy free and fair elections, a free press, and good educational opportunity all over the country, something I hope they experience sooner rather than later. Meanwhile, I'm actually more optimistic about India during my lifetime. [1] http://www.amazon.com/Japan-Number-One-Lessons-America/dp/1583484108 http://www.amazon.com/Japan-Number-One-Lessons-America/dp/15... [2] http://www.bbc.com/news/world-asia-china-23975037 http://www.bbc.com/news/world-asia-china-23975037 http://news.xinhuanet.com/english/2007-03/07/content_5812838.htm http://news.xinhuanet.com/english/2007-03/07/content_5812838...
- nahname 13y ago
firstOrder 13y ago
China's GDP has grown 7% or more every year since 1991. It had an impressive economic record before that as well. You can read gloomy articles like this going back to 1949. In that time, China has become the second largest economy in the world. I was reading articles like this a decade ago, I was reading articles like this two decades ago. People have been saying the sky is falling since 1949. Despite all of that, China's GDP will probably grow 7% this year, as well as 7% next year.
hibikir 13y ago
There is no need for a zombie China. Japan became a zombie due to terrible monetary policy. Ben Bernanke wrote a big paper about it: Japanese Monetary Policy: A case of self Induced Paralysis? So even if China found itself in the exact same situation as Japan was that day, we'd only see the equivalent of a lost decade if the Chinese monetary policy was as backwards as that of the Japanese back then, and after that, and the latest world financial crisis, I'd be shocked if China repeated the behavior of yesteryear. This is especially true due to China's love of playing with the country's exchange rate. The Chinese central bank would not bat an eye if it had to devaluate the Renminbi forty percent. So while the article describes the current situation very well, the predictions aren't really necessary given the premises.
- dageshi 13y ago
  Aren't they following the same path already? The massive dump in credit (cheap money) into the Chinese Banking system after 2008 seems to be following the same path that America/UK took after 2001. A recession causes the central bank to ease and real estate/asset bubbles begin to blow up but external factors (chinese export deflation in the 2000's, and weak global demand today) keep inflation low. The cheap money effectively subverts large parts of the economy because they become dependent on it, but it only works while there are asset classes that can continue to rise and can be easily traded into and out of e.g. real estate. Mr Bernanke as you quoted wrote a paper about this and yet in the end the Central Bank alone in the US could not contain the fallout when the bubble could blow no bigger. The US government had to absorb the losses by writing cheques to bailout the institutions that were failing until they reached a point where it was no longer politically feasible. I don't see an easy solution to this, the issue is not just bad debt, it's that there won't be an asset class to bid up anymore, there won't be a practical way to get that easy credit into the system anymore.
cilea 13y ago
One important point not mentioned: Japan were alone when the country's economy collapsed in late 80's. Today's China is surrounded with relatively strong peripheral economies (Taiwan, Korea, etc.) The support is there. Also, do not discount black-market economy. It's difficult to keep track of economic progress in a cash-based economy. The strength of China's domestic economy is often discounted by foreigners because of economic activities unaccounted for. The real worry is the aging population and the lack of social welfare.
- logicchains 13y ago
  While the lack of social welfare could be considered a problem from a moral perspective, in terms of the national economy it's not a negative. Compare for instance the situation where 50% of elderly Chinese starve after they stop working, and the situation where 50% go on extensive state welfare. In both situations the elderly aren't producing anything, but in the latter they're consuming national resources and in the former they aren't, so from an economic perspective the former would produce better results. Of course this isn't a very humane way of looking at it, but the Chinese leadership don't have a history of particularly humane behaviour.
Gravityloss 13y ago
A well written article, I liked that it avoided jargon.
- hga 13y ago
  Indeed, although there's one bit of jargon I recently learned that I think is really useful: financial repression (https://en.wikipedia.org/wiki/Financial_repression https://en.wikipedia.org/wiki/Financial_repression). Ask anyone in the US trying to live off interest income right now, like my 77 and 80 year old parents. Aren't that real interest rates in the US negative or thereabouts, and I read that was true following the bust in Japan. (Except of course in the US as of now our money isn't trapped in the country, unlike Japan's back then for individuals and small business as mentioned in the article, or China, who's currency wasn't even internationally traded until a pilot scheme started in 2009, and is still, in the scheme of things, taking baby steps.)
caio1982 13y ago
That's a really nice piece, specially given the comparisons used in the article. However, as a layman, I wonder whether 1) chinese socialism and 2) its ownership of other major countries' debt make it all different or not. I suppose it does. Their government seems able to do "magic" tricks with its economy without pretty much any foreigner nosing around, and it also seems to me that the chinese are everywhere. I don't recall japanese companies owning so much of the world back in the 90's as the chinese do now with their infrastructures projects in South America and Africa, the US's debt thing etc. I think if they ever fail like the japanese did, they'd eventually drag a lot of countries with them down the hole because of these global tentacles. Except if the only part of this article worth analysing is its very end: "[...] or permitting foreign banks to compete [in the chinese market]", then it's case closed and it was just a piece of banking propaganda against China.
- Amezarak 13y ago
  Japan is actually the second biggest foreign holder of US debt. As of February 2014, Japan held 1.210 trillion of US debt while China held 1.272 trillion. http://www.treasury.gov/ticdata/Publish/mfh.txt http://www.treasury.gov/ticdata/Publish/mfh.txt I am having trouble finding historical data, but what I can find from the 90s indicates that Japan alternated for the top foreign US debt holder with the UK. I am not really sure what data to look for general Japanese foreign investment.
- lmm 13y ago
  > I don't recall japanese companies owning so much of the world back in the 90's as the chinese do now with their infrastructures projects in South America and Africa, the US's debt thing etc. Don't you? There were jokes about how the Japanese owned so much of California they might as well buy the state from the US.
camperman 13y ago
This is a superb article but it's scary how many of the points made apply directly to the US economy as well: zombie banks, real estate bubbles, a declining currency, faith in the bureaucrats and so on.
- diminish 13y ago
  Fed's decade long easy money policy had a vitalizing effect on many businesses in many countries...Soon unfortunately we may get a zombie attack all over the world.
- aarkling 13y ago
  We're already a zombie...
- ChrisGaudreau 13y ago
  Americans have faith in bureaucrats?
  - nova 13y ago
    Except libertarians most people do, as long as they're "their" bureaucrats.
- pingburg 13y ago
  I think the underlying mechanism here is a centralized banking system in all three countries. Without getting into the religious discussion of whether a central bank is "right or "wrong", I would suggest that any system that relies on a small group of unelected humans making decisions on the supply of the underlying medium of exchange is imperfect and prone to favoring one group over another for reasons that are not positive for everyone.
  - brc 13y ago
    In other words...we all agree that price fixing leads to either shortages or surpluses..but we all agree that fixing the price of money in a central bank is the right way to go. And we are not able to see the contradiction therein.
jotm 13y ago
Well, I can't comment on the macro economics, but on the small business side, I can say that China will do much better than Japan. The Japanese are deadly afraid of commitment and responsibility for some reason (the culture, likely), which is not the case with the Chinese, who can bootstrap like crazy and are less afraid of taking risks - although the latter might be because they have nothing to lose. Plus, China's got 10x the population...
- daliusd 13y ago
  Could you base your arguments with some facts? I work in international company and don't find Chinese in the top risk taking colleagues (Americans win big in this area). That's equally anecdotal like in your case but since it is different experience it would be interesting to hear where you experience comes from.
- adventured 13y ago
  The Japanese are afraid of responsibility since what century exactly? I've never heard of that. I've only heard the opposite in fact: that being responsible is among the most important cultural things to the Japanese. You see it in the history of how they view employment between employers and workers for example. A general sense of making things right. I think you'd be very hard pressed to find a people more responsible than the Japanese.
  - ChrisGaudreau 13y ago
    Probably has something to do with their high national debt. Many people seem to believe that high national debt reflects a population that chooses government subsidies over employment. You see that with Greece and Spain a lot.
    - jpatokal 13y ago
      Huh? Japan's employment rate remains extraordinarily high (3.6% unemployment, after ~20 years of recession!), and Japan's government debt is almost entirely to Japanese investors.
Zigurd 13y ago
These "We're #1 and they're going down" articles irk me. Look at the last decade: http://snbchf.com/global-macro/gdp-growth-per-capita/ http://snbchf.com/global-macro/gdp-growth-per-capita/ As the proverb goes, we need to take the plank out of our own eye. Those commies in Sweden are kicking our libertarian asses.
- waterlesscloud 13y ago
  Of course, in terms of raw dollars US GDP annual growth is the same or higher than Sweden's entire GDP.
  - Zigurd 13y ago
    Even the GDP per capita number is misleadingly optimistic if the 0.01% are taking the lion's share of growth that I'll stipulate might be "the same or higher than Sweden's entire GDP." If the typical American isn't prospering, what good is it?
    - tty 13y ago
      >If the typical American isn't prospering, what good is it? Well, neither is the typical Swede. They have an astronomical housing bubble that's just waiting to burst, the average household has a debt around twice the income, while the gap between rich and poor has been widening for a long time now. It's not all roses and relative to where they are, most seem to be preparing for worse days ahead, rather than better ones.
      - Zigurd 13y ago
        The reason I used Sweden as an example is that many Americans think commerce in Sweden must be hobbled by taxes and regulation. It must surprise some people that Sweden's GDP per capita has grown the most among Western industrial nations, and much more than the US. I'm not claiming the wealth gap in Sweden is healthy on an absolute scale, but relative to the US it's about half. Every economy has challenges, but the historical results I posted show that US chest-thumping is exceptionally silly.
garfelnagel 13y ago
It's funny, but the banks in the US are not being allowed to die either. Could we be in the same boat?
phoebus 13y ago
Why no one mentioned the big difference between china and japan? Japan is actually a dependant state of usa. So usa can take advantage of japan whenever it wants, consider the Plaza Accord when usa destroyed japan's economy. China, whatever you name it, is a independent nation. It is not easy to order China to do something, not like japan.
msandford 13y ago
Yeah that's great. We're well on our way to a lost decade or two ourselves, replete with zombie banks and corporations. This might as well be an indictment of the decline of the US rather than the decline of China or Japan.
westiseast 13y ago
The common factor across most political systems is that political/economic systems tend to carry on with the way they are going until they either proactively reform or hit a wall (a crisis or crash). The article explains well Japan's faults - without a definitive crash, politicians continued in their support of poor economic policies for a long, long time. A few commenters argue that China is different - it has different features, but the above tendency will prevail here. Chinese politicians, businessmen and economists are hugely invested in a system that is top heavy, vastly corrupt and built around pillars of cheap labour, property/development and credit-based investment. Politically speaking, they are also committed to a system based around media control, repression, lack of debate and 'stability' (ie. no change of the political status quo). My personal fear - my house, family and business are all in China - is that in the face of an economic crisis, we will also see a backwards slide into repression as the party attempts to put an iron grip on the economy AND public opinion. My great hope is that China will see a few years of correction - letting the people's income catch up with the bubbles, supported by a government that is aware of the problems and motivated to act. Let's see...
Al-Khwarizmi 13y ago
This Quartz website, often linked in HN, is a usability nightmare. In my Android phone's browser, I just cannot see any text at all, apparently I see a sidebar full-screen. In my choice desktop browser (Opera 12), I do see the article but for some reason it auto-scrolls up every few seconds, so I cannot read it. I can read it in Firefox but with noticeable UI latency when scrolling, as if my computer was 3 or 4 years older than it is. Seriously, these guys should fix their website...
- T-hawk 13y ago
  Quartz does the same thing in Opera 12 for me. (Hooray, I'm not the last Opera 12 holdout on the planet.) Turning off Javascript for the site makes it readable normally, though.

196 points by throwaway2048 13y ago

This is well written argument, but there is one big difference between China now and Japan then. China is still going through urbanization in unprecedented scale. About half of the Chinese live in cities now. By 2030, cities will be home to 70 per cent of China’s population and generate 75 per cent of its GDP. There will be 200 million Chinese moving into cities in next few decades. China can be close to where Japan is now in the 2040 banking crisis. For now, even massive crisis just delays the inevitable increase in demand that eats away all mistakes in fiscal and monetary policy. http://insights.som.yale.edu/insights/what-should-we-understand-about-urbanization-china http://insights.som.yale.edu/insights/what-should-we-underst... http://www.cn.undp.org/content/china/en/home/presscenter/pressreleases/2013/08/unprecedented-pace-of-urbanization-presents-challenges-and-oppor/ http://www.cn.undp.org/content/china/en/home/presscenter/pre... http://www.cn.undp.org/content/china/en/home/presscenter/pressreleases/2013/08/unprecedented-pace-of-urbanization-presents-challenges-and-oppor/ http://www.cn.undp.org/content/china/en/home/presscenter/pre...

npalli 13y ago
Yes, the urbanization argument for this time it's different. There is bound to be massive urbanization in China. However what it ignores is the price of housing the newly urbanized can afford. Eventually it will have to settle to the economic value they add in the global marketplace. The price of housing at many of these new ghost cities is already close to the level of heavily developed western cities. So that leaves two possibilities 1. Every newly urbanized Chinese person moving from the country side will generate the economic potential of a Chicago or London person. So another 200 million investment bankers I suppose. 2. The property values of these ghost cities will dramatically deflate to measure up to the economic value added by the newly urbanized. Which means the value of these massive properties needs to written down by the banks. Most people making the urbanization argument assume that option 1 will invariably occur. When in fact it is overwhelming likely that option 2 will occur looking at the massive number of people being urbanized and the massive deflationary pressure on every occupation. Urbanization per se will not cure the ghost cities problem. You have to look at the prices too.
- nabla9 13y ago
  There will be #2, but coming banking crisis will be temporary, not decades long zombie slump like in already developed and urbanized Japan.
  - npalli 13y ago
    The situation in Japan developed because the real estate got disconnected from its economic potential by a large margin. At the peak of the bubble in the mid-80’s the land value of just the imperial palace in Tokyo was worth more than the entire land value of California. A million times ratio!!. There is no amount of urbanization that could have solved this problem for you because the underlying economics did not make sense. In the end, I’m not sure the Japanese had a choice, maybe they could have let some banks fail earlier but the size of the bubble was so massive that immediate deflation would have triggered a Lehmann like moment for them. In fact, if Option 2 is correct I’m pretty sure the Chinese leadership has no other option but to deflate the economic gap with a zombie like situation for decades. If you think they will let a Lehmann-like moment to happen and quickly reset prices back to the ‘right’ level you are mistaken. It would put the financial system at risk; the entire legitimacy of the CCP in danger and that would mean blood on the streets. They will keep shutting down the smaller non-state banks and keep rolling the loans of the bigger state banks and gradually write off the debt over several years. There is definitely no shock therapy of short-term pain that makes sense.
    - justincormack 13y ago
      The land value of Beijing is now 60% of US GDP, the same ratio Tokyo was at at its peak (its a somewhat odd measure, but hey).
- Symmetry 13y ago
  Where are you getting your information on the price of housing in China? Looking up some statistics on line I found an average of $1,742/m in China versus $15,284/m in the US. It might be that there are some massively overpriced developments, but they don't seem to be moving aggregate prices much so they can't be that big a deal on an economy-wide basis. But in the end prices are simply an abstraction over the physical economy. China has an awful lot of families crammed into a single room, so there's clearly a reasonable case for building lots more housing. Like all abstractions they can screw things up and deflation can certainly cause problems, but not when it's much smaller than growth and Chinese inflation is right now comfortably over 4%.
oscargrouch 13y ago
The author of the article only forgot a little detail.. the population size and the urbanization phenomena... Only when this stop to happen, we will be able to see the real size of the china economy.. not to mention the "last drop", when they will push efficiency into the engines, to get a little more expansion.. US and Japan already did both.. and til someone discover a new economical path.. nowhere to go for them.. So only china and the emergents will be able to grow right now, under the old economical gears.. (not to mention that nobody is making more babies anyway to fill the void)

execonomist 13y ago

I'm not too impressed by this argument. You could easily compare China with South Korea or Taiwan and come to the opposite conclusion. This is why you should never trust an argument that relies on two data points. In fact, don't trust macroeconomists in general: individual preferences cannot be aggregated, at least not with our present mathematical tools. As a result, micro-founded macro models (99% of them) are complete nonsense: that's why Caltech doesn't even bother teaching macro to its PhD students anymore. It also explains why DSGE models have no predictive power whatsoever. Rant over.

lisptime 13y ago
indeed http://econlog.econlib.org/archives/2008/03/junk_macroecono_1.html http://econlog.econlib.org/archives/2008/03/junk_macroecono_...
magoghm 13y ago
"that's why Caltech doesn't even bother teaching macro to its PhD students anymore" this seems interesting. Any source for that?
deleted 13y ago
[deleted]

jusben1369 13y ago

I read the Quartz regularly and enjoy much of what they write. However, they do appear to have an obsession with China and are nearly all doom and gloom. Maybe that's because they're right and China is a house of cards about to fall but I've found I have to take everything they write on China with a pinch of salt as they write 1 or 2 articles per week on how screwed China is.

AJ007 13y ago
Is Quartz biased against China or are other news organizations restricting their reporting in order to ensure maximum access to the Chinese market? http://www.nytimes.com/2014/03/21/business/international/bloomberg-should-have-rethought-articles-on-china-chairman-says.html http://www.nytimes.com/2014/03/21/business/international/blo...

aarkling 13y ago

Even if it starts stagnating it will pass the US in total GDP. China has 10x the population of Japan. Not that it matters. The average Chinese will still be a lot poorer than the average American.

hga 13y ago
However, thanks to the PRC's 1979 "one-child policy", they look to be the first country to skip from the "industrializing" stage which generally has reasonable population growth (weasel wording since Japan's fertility started declining in 1974 and has yet to stop), to the sort of modern social welfare state we see in the West with too few producers trying to support too many dependents. Except of course they don't have much of a welfare state. It's sometimes called the 4-2-1 problem: 4 grandparents produced 2 parents who produced 1 child. It's one of the reasons for their very high savings rates, even with negative real returns. And like Japan, the retirees are in for unpleasant times when they try to turn paper wealth into real consumption.

tokenadult 13y ago

First I read all the comments already posted here. Then I read the fine article from beginning to end. This is a good article, and well worth a read. I am old enough to remember the kind of reporting that was done about Japan in the English-language press back when the book Japan as Number One[1] had just been published. Japan used to look unstoppable in the same way that China looks world-beating to many people now. But Japan's "lost decade" of minimal economic growth and declining soft power in the world has lasted a lot longer than just one decade. Japan in the 1980s already had significant advantages that China still lacks in the 2010s. First of all, it had a political system with actual elections that weren't wholly rigged. (The political system in Japan has opened up more since then, but even thirty years ago it was well ahead of where China's political system is now.) Second, Japan had a free press and unfettered access to foreign reporters and foreign news media for decades by the 1980s. China still doesn't have either of those information channels for correcting problems in sufficient degree. Third, although primary education in China is quite good in urban areas, good primary education in China is still not as pervasive nationwide as it was in Japan by the 1980s. That's illustrated in part by how few people in China (compared to Japan) are even conversant in the national language. Barely more than half the population is conversant in standard Mandarin Chinese.[2] China is at risk. The "socialism with Chinese characteristics" (中国特色社会主义) economic policy it officially now has cannot be sustained. It looks like it has been growing rapidly in recent years for some of the same reasons that Spain looked like it was growing rapidly a decade ago--a housing bubble. The inevitable correction that has to happen in the investment markets in China may not bring about a recession, but it can't help but bring about a change of investment priorities that may make China look less amazing for a while. China will really rise to world prominence when its common people enjoy free and fair elections, a free press, and good educational opportunity all over the country, something I hope they experience sooner rather than later. Meanwhile, I'm actually more optimistic about India during my lifetime. [1] http://www.amazon.com/Japan-Number-One-Lessons-America/dp/1583484108 http://www.amazon.com/Japan-Number-One-Lessons-America/dp/15... [2] http://www.bbc.com/news/world-asia-china-23975037 http://www.bbc.com/news/world-asia-china-23975037 http://news.xinhuanet.com/english/2007-03/07/content_5812838.htm http://news.xinhuanet.com/english/2007-03/07/content_5812838...

nahname 13y ago

firstOrder 13y ago

China's GDP has grown 7% or more every year since 1991. It had an impressive economic record before that as well. You can read gloomy articles like this going back to 1949. In that time, China has become the second largest economy in the world. I was reading articles like this a decade ago, I was reading articles like this two decades ago. People have been saying the sky is falling since 1949. Despite all of that, China's GDP will probably grow 7% this year, as well as 7% next year.

hibikir 13y ago

There is no need for a zombie China. Japan became a zombie due to terrible monetary policy. Ben Bernanke wrote a big paper about it: Japanese Monetary Policy: A case of self Induced Paralysis? So even if China found itself in the exact same situation as Japan was that day, we'd only see the equivalent of a lost decade if the Chinese monetary policy was as backwards as that of the Japanese back then, and after that, and the latest world financial crisis, I'd be shocked if China repeated the behavior of yesteryear. This is especially true due to China's love of playing with the country's exchange rate. The Chinese central bank would not bat an eye if it had to devaluate the Renminbi forty percent. So while the article describes the current situation very well, the predictions aren't really necessary given the premises.

dageshi 13y ago
Aren't they following the same path already? The massive dump in credit (cheap money) into the Chinese Banking system after 2008 seems to be following the same path that America/UK took after 2001. A recession causes the central bank to ease and real estate/asset bubbles begin to blow up but external factors (chinese export deflation in the 2000's, and weak global demand today) keep inflation low. The cheap money effectively subverts large parts of the economy because they become dependent on it, but it only works while there are asset classes that can continue to rise and can be easily traded into and out of e.g. real estate. Mr Bernanke as you quoted wrote a paper about this and yet in the end the Central Bank alone in the US could not contain the fallout when the bubble could blow no bigger. The US government had to absorb the losses by writing cheques to bailout the institutions that were failing until they reached a point where it was no longer politically feasible. I don't see an easy solution to this, the issue is not just bad debt, it's that there won't be an asset class to bid up anymore, there won't be a practical way to get that easy credit into the system anymore.

cilea 13y ago

One important point not mentioned: Japan were alone when the country's economy collapsed in late 80's. Today's China is surrounded with relatively strong peripheral economies (Taiwan, Korea, etc.) The support is there. Also, do not discount black-market economy. It's difficult to keep track of economic progress in a cash-based economy. The strength of China's domestic economy is often discounted by foreigners because of economic activities unaccounted for. The real worry is the aging population and the lack of social welfare.

logicchains 13y ago
While the lack of social welfare could be considered a problem from a moral perspective, in terms of the national economy it's not a negative. Compare for instance the situation where 50% of elderly Chinese starve after they stop working, and the situation where 50% go on extensive state welfare. In both situations the elderly aren't producing anything, but in the latter they're consuming national resources and in the former they aren't, so from an economic perspective the former would produce better results. Of course this isn't a very humane way of looking at it, but the Chinese leadership don't have a history of particularly humane behaviour.

Gravityloss 13y ago

A well written article, I liked that it avoided jargon.

hga 13y ago
Indeed, although there's one bit of jargon I recently learned that I think is really useful: financial repression (https://en.wikipedia.org/wiki/Financial_repression https://en.wikipedia.org/wiki/Financial_repression). Ask anyone in the US trying to live off interest income right now, like my 77 and 80 year old parents. Aren't that real interest rates in the US negative or thereabouts, and I read that was true following the bust in Japan. (Except of course in the US as of now our money isn't trapped in the country, unlike Japan's back then for individuals and small business as mentioned in the article, or China, who's currency wasn't even internationally traded until a pilot scheme started in 2009, and is still, in the scheme of things, taking baby steps.)

caio1982 13y ago

That's a really nice piece, specially given the comparisons used in the article. However, as a layman, I wonder whether 1) chinese socialism and 2) its ownership of other major countries' debt make it all different or not. I suppose it does. Their government seems able to do "magic" tricks with its economy without pretty much any foreigner nosing around, and it also seems to me that the chinese are everywhere. I don't recall japanese companies owning so much of the world back in the 90's as the chinese do now with their infrastructures projects in South America and Africa, the US's debt thing etc. I think if they ever fail like the japanese did, they'd eventually drag a lot of countries with them down the hole because of these global tentacles. Except if the only part of this article worth analysing is its very end: "[...] or permitting foreign banks to compete [in the chinese market]", then it's case closed and it was just a piece of banking propaganda against China.

Amezarak 13y ago
Japan is actually the second biggest foreign holder of US debt. As of February 2014, Japan held 1.210 trillion of US debt while China held 1.272 trillion. http://www.treasury.gov/ticdata/Publish/mfh.txt http://www.treasury.gov/ticdata/Publish/mfh.txt I am having trouble finding historical data, but what I can find from the 90s indicates that Japan alternated for the top foreign US debt holder with the UK. I am not really sure what data to look for general Japanese foreign investment.
lmm 13y ago
> I don't recall japanese companies owning so much of the world back in the 90's as the chinese do now with their infrastructures projects in South America and Africa, the US's debt thing etc. Don't you? There were jokes about how the Japanese owned so much of California they might as well buy the state from the US.

camperman 13y ago

This is a superb article but it's scary how many of the points made apply directly to the US economy as well: zombie banks, real estate bubbles, a declining currency, faith in the bureaucrats and so on.

diminish 13y ago
Fed's decade long easy money policy had a vitalizing effect on many businesses in many countries...Soon unfortunately we may get a zombie attack all over the world.
aarkling 13y ago
We're already a zombie...
ChrisGaudreau 13y ago
Americans have faith in bureaucrats?
- nova 13y ago
  Except libertarians most people do, as long as they're "their" bureaucrats.
pingburg 13y ago
I think the underlying mechanism here is a centralized banking system in all three countries. Without getting into the religious discussion of whether a central bank is "right or "wrong", I would suggest that any system that relies on a small group of unelected humans making decisions on the supply of the underlying medium of exchange is imperfect and prone to favoring one group over another for reasons that are not positive for everyone.
- brc 13y ago
  In other words...we all agree that price fixing leads to either shortages or surpluses..but we all agree that fixing the price of money in a central bank is the right way to go. And we are not able to see the contradiction therein.

jotm 13y ago

Well, I can't comment on the macro economics, but on the small business side, I can say that China will do much better than Japan. The Japanese are deadly afraid of commitment and responsibility for some reason (the culture, likely), which is not the case with the Chinese, who can bootstrap like crazy and are less afraid of taking risks - although the latter might be because they have nothing to lose. Plus, China's got 10x the population...

daliusd 13y ago
Could you base your arguments with some facts? I work in international company and don't find Chinese in the top risk taking colleagues (Americans win big in this area). That's equally anecdotal like in your case but since it is different experience it would be interesting to hear where you experience comes from.
adventured 13y ago
The Japanese are afraid of responsibility since what century exactly? I've never heard of that. I've only heard the opposite in fact: that being responsible is among the most important cultural things to the Japanese. You see it in the history of how they view employment between employers and workers for example. A general sense of making things right. I think you'd be very hard pressed to find a people more responsible than the Japanese.
- ChrisGaudreau 13y ago
  Probably has something to do with their high national debt. Many people seem to believe that high national debt reflects a population that chooses government subsidies over employment. You see that with Greece and Spain a lot.
  - jpatokal 13y ago
    Huh? Japan's employment rate remains extraordinarily high (3.6% unemployment, after ~20 years of recession!), and Japan's government debt is almost entirely to Japanese investors.

Zigurd 13y ago

These "We're #1 and they're going down" articles irk me. Look at the last decade: http://snbchf.com/global-macro/gdp-growth-per-capita/ http://snbchf.com/global-macro/gdp-growth-per-capita/ As the proverb goes, we need to take the plank out of our own eye. Those commies in Sweden are kicking our libertarian asses.

waterlesscloud 13y ago
Of course, in terms of raw dollars US GDP annual growth is the same or higher than Sweden's entire GDP.
- Zigurd 13y ago
  Even the GDP per capita number is misleadingly optimistic if the 0.01% are taking the lion's share of growth that I'll stipulate might be "the same or higher than Sweden's entire GDP." If the typical American isn't prospering, what good is it?
  - tty 13y ago
    >If the typical American isn't prospering, what good is it? Well, neither is the typical Swede. They have an astronomical housing bubble that's just waiting to burst, the average household has a debt around twice the income, while the gap between rich and poor has been widening for a long time now. It's not all roses and relative to where they are, most seem to be preparing for worse days ahead, rather than better ones.
    - Zigurd 13y ago
      The reason I used Sweden as an example is that many Americans think commerce in Sweden must be hobbled by taxes and regulation. It must surprise some people that Sweden's GDP per capita has grown the most among Western industrial nations, and much more than the US. I'm not claiming the wealth gap in Sweden is healthy on an absolute scale, but relative to the US it's about half. Every economy has challenges, but the historical results I posted show that US chest-thumping is exceptionally silly.

garfelnagel 13y ago

It's funny, but the banks in the US are not being allowed to die either. Could we be in the same boat?

phoebus 13y ago

Why no one mentioned the big difference between china and japan? Japan is actually a dependant state of usa. So usa can take advantage of japan whenever it wants, consider the Plaza Accord when usa destroyed japan's economy. China, whatever you name it, is a independent nation. It is not easy to order China to do something, not like japan.

msandford 13y ago

Yeah that's great. We're well on our way to a lost decade or two ourselves, replete with zombie banks and corporations. This might as well be an indictment of the decline of the US rather than the decline of China or Japan.

westiseast 13y ago

The common factor across most political systems is that political/economic systems tend to carry on with the way they are going until they either proactively reform or hit a wall (a crisis or crash). The article explains well Japan's faults - without a definitive crash, politicians continued in their support of poor economic policies for a long, long time. A few commenters argue that China is different - it has different features, but the above tendency will prevail here. Chinese politicians, businessmen and economists are hugely invested in a system that is top heavy, vastly corrupt and built around pillars of cheap labour, property/development and credit-based investment. Politically speaking, they are also committed to a system based around media control, repression, lack of debate and 'stability' (ie. no change of the political status quo). My personal fear - my house, family and business are all in China - is that in the face of an economic crisis, we will also see a backwards slide into repression as the party attempts to put an iron grip on the economy AND public opinion. My great hope is that China will see a few years of correction - letting the people's income catch up with the bubbles, supported by a government that is aware of the problems and motivated to act. Let's see...

Al-Khwarizmi 13y ago

This Quartz website, often linked in HN, is a usability nightmare. In my Android phone's browser, I just cannot see any text at all, apparently I see a sidebar full-screen. In my choice desktop browser (Opera 12), I do see the article but for some reason it auto-scrolls up every few seconds, so I cannot read it. I can read it in Firefox but with noticeable UI latency when scrolling, as if my computer was 3 or 4 years older than it is. Seriously, these guys should fix their website...

T-hawk 13y ago
Quartz does the same thing in Opera 12 for me. (Hooray, I'm not the last Opera 12 holdout on the planet.) Turning off Javascript for the site makes it readable normally, though.