Beijing is struggling to stem a nationwide slump in property prices, and economists have compared the situation to Japan’s. The last ones the data show, that China has reduced bank lending to businesses and households for the first time in nearly twenty years. This indicates that the country is experiencing a “balance sheet recession” following the Japanese model of the early 1990s. This is a situation where consumers and companies prefer to pay off debt rather than spend and invest, which holds back the country’s economic growth.
Factors causing the balance sheet recession in China
First, falling real estate prices reduced asset values, which affected the financial stability of both companies and consumers. Second, as lending to businesses and households declined, opportunities for investment and spending were limited. A decline in retail sales was observed for several months, which ended with a decrease in consumer activity.
It should be noted that deflation has lasted for five consecutive quarters, the first time since the 1990s. This reduced incentives for spending and investment. Obviously, the instability of the world economy also affects exports and investments.
Disturbing parallels between Asia’s two largest economies
To build an innovative economy, Beijing’s policymakers are looking to the economic model of Seoul in the 1990s. But the prospects of “Japanization” are somewhat doubtful: after all, GDP per capita and the level of urbanization in China are much lower than in Japan in the 1990s. This means that the comparison with a developed economy such as Japan is not entirely correct for China, which is still trying to achieve such a status. By these measures, China is more like South Korea, which survived its turn-of-the-century crisis during the Asian financial crisis and emerged stronger.
“Japan in the 1990s was like a middle-aged man,” – noted the author of the report “Japanization or Koreanization?” and an analyst for a Chinese financial services company. “Korea in 1998 and China today are no longer teenagers, but they are still young and can grow and become stronger. This is the biggest difference.”
The leadership of South Korea also began to actively develop the sphere of services and science-intensive industries. Entrepreneurs responded to this by producing high-tech goods and increasing exports.
Today, Beijing is betting on scientific and technological innovations that contribute to the economic transformation of the country. China is actively producing electric vehicles, spurring its automakers to expand globally. Investments in clean technology have also helped China dominate the production of solar panels and lithium-ion batteries.
The chief economist for the Asia-Pacific region of S&P Global Ratings, a leading international credit rating agency, sees parallels between post-crisis South Korea and modern China. He notes that the latter has “relatively good opportunities” for further improvement in living standards.
But he also points to two important differences: government intervention in the economy is specific to China, and the country, a global exporter, faces resistance from the United States and Europe, where politicians raise tariffs or impose embargoes on Chinese goods. “Our long-term growth and productivity forecasts for China are largely driven by the trajectory of South Korea and Taiwan. But we do take those two factors into account when assessing China,” says the economist.
“The Lost Decade” of the Land of the Rising Sun
The deputy head of the Institute of Japanese Studies of the Chinese Academy of Social Sciences predicts that China’s long-term economic growth rate will be in the range of 4-6%, which is significantly higher than Japan’s. Since 2000, Japan’s economy, Asia’s second largest, has grown by an average of less than 0.8%.
The Land of the Rising Sun failed to take advantage of the opportunities provided by the technological advances of the 1990s, including the introduction of the Internet. After the real estate and stock market bubbles of the 1980s, Japan entered a period of stagnation known as the “Lost Decade.” This limited investment in new technologies and innovations. Many Japanese companies conducted business conservatively, which made it difficult to quickly introduce new technologies and adapt to changes in the market.
With an aging population and a declining birthrate, Japan has faced labor shortages and rising social costs, which have also affected economic growth and innovation.
To avoid such a scenario, Beijing launched the “Made in China” project nearly a decade ago, identifying next-generation industries as national priorities.
Why South Korea – as opposed to Japan – can be a better example for China
At the beginning of its crisis, the “land of morning freshness” had a level of development more similar to modern China than Japan in the 1990s. This makes South Korea’s experience more relevant to China. South Korea was able to successfully overcome the Asian financial crisis of the late 1990s and emerge stronger from it. They restructured insolvent enterprises and improved corporate governance, which contributed to economic growth.
According to the aforementioned analyst, South Korea in 1998 and China today still have the potential for growth and development, unlike Japan in the 1990s, which had already reached a high level of development and faced the challenges of a mature economy.
South Korea was able to quickly adapt to the new economic conditions, which can be a useful example for China, which is now looking for new drivers of growth.
State intervention in the economy of Beijing vs Seoul
State intervention in China’s economy through the one-party system of the Celestial Empire has long been a proverb in tongues. The Communist Party controls all aspects of government, economic processes, and decisions that can quickly affect the economy. The Chinese government believes that government intervention is absolutely necessary to maintain social stability in a country with a large population. It is worth remembering that China’s economy has long been planned, and although it is now more market-oriented, the state still plays a significant role in strategic sectors such as energy, transport and technology.
South Korea, on the contrary, after an authoritarian rule, chose democracy, which contributed to the reduction of state intervention in the economy and the development of market mechanisms.
Comparing the economies of two countries is always difficult, especially when one of them is as big as China. Economist Macquarie Group Ltd. noted: “China is much bigger than Korea. It is much easier for the world to accept the growth of Korea than the growth of China.”
Tatyana Morarash
