China has defied doomsayers who have warned for years that the biggest economy in Asia would soon suffer a Japan-style boom and bust. It will continue to defy them for years to come.
At first glance, there appear to be some major similarities between their economies. Just like Japan about two decades ago, China is under pressure to let its currency rise, raise domestic consumption and grow its service industry to cut reliance on exports and investment.
A slowdown in economic growth for seven straight quarters and a view among analysts that growth could be closer to 5% by the end of the decade than the nearly 10% it has averaged for the last 30 years, has revived concerns that China faces a Japan-style battle with stagnation.
But analysts say China is hardly a Japan in the making.
Abundant room for greater consumption and wealth, a slow-rising currency and steps to cool property markets will leave it in a good position to avoid Japan’s experience.
Whether China succeeds in avoiding an economic crash depends on how far it can turn its maturing, export-driven economy into one more geared to services and domestic consumption. The World Bank has said that that transition must happen well before 2030.
Beijing would also have to replace central planning with a market-driven growth model.
If the transformation struggles, the biggest risk is that China falls back on the housing market for growth, said Tomo Kinoshita, chief economist at Nomura Securities.
That could lead to a bubble and bust in what is already a market that may lack strong underpinnings. Sky-high property prices were a major factor behind Japan’s economic bust.
Because property accounts for 13% of economic activity in China and fuels about 40 industries, it is a tempting crutch for policy makers.
The Chinese central bank acknowledged the policy quandary at a meeting of the International Monetary Fund and the World Bank in Tokyo this month.
It is a “delicate situation,” Yi Gang, deputy governor of the central bank, the People’s Bank of China, told a financial forum. On the one hand, housing is a crucial driver of growth, but on the other hand, it should be kept stable.
The strongest argument for why the Chinese economy will avoid Japan’s experience is that it has plenty more room to grow. HSBC says it could be another decade before momentum runs out from 1978 big-bang reforms, when China started to open its economy to market forces.
Despite having grown an average of 10% for 30 years, China is still years behind pre-bubble Japan.
China’s gross domestic product per capita last year was $5,445 U.S., about that of Japan in 1963, according to World Bank data adjusted for price changes.
When the Japanese economy crashed in 1990 and began its "lost decade" of economic stagnation, its G.D.P. per capita was the equivalent of $43,000 U.S. in 2011 terms
Some say Japan’s biggest error was to allow an economic bubble to form by leaving interest rates too low for too long. It prolonged the pain by delaying a mop-up of its bad debt.
The yen gets blamed too, for different reasons. Those in the West say Japan was too slow in letting the yen rise as the country’s economy grew quickly. But Beijing says Tokyo erred by caving in to foreign pressure to let the yen rise too fast, too far.
The yen’s nominal effective exchange rate, or its trade-weighted exchange rate, leaped 57% in the three years after Tokyo signed the Plaza Accord in 1985 with Britain, France, West Germany and the United States to push the dollar down and reduce the U.S. trade deficit.
By the time the Japanese economy began wobbling in 1990, the yen had retreated but was still up about 30% in trade-weighted terms in five years.
In China today, exporters are the loudest opponents of Beijing’s long-term plan to let the tightly controlled renminbi trade more freely, fearing it will crimp their competitiveness and lead to a Japan-like economic slump.
Indeed, Beijing has allowed the renminbi’s nominal effective exchange rate to climb at a less-intensive pace of 20% in the seven years since it revalued the currency against the dollar in 2005.
Beijing says the renminbi is near an equilibrium level, adding to stock phrases that the currency must be "basically stable" and that changes should be "gradual."
Mindful of criticism that the Bank of Japan overcompensated for a strong yen when it cut rates five times between 1985 and 1989, analysts argue China has been more vigilant on monetary policy, too.
It has been more aggressive in raising interest rates when the economy is doing well but resisted pressure for aggressive cuts when times were bad.
It lifted rates five times between 2010 and 2011 as the Chinese economy recovered from the 2008 global financial crisis. When growth cooled this year, it reversed policy with two rate cuts, but has held its ground since despite market calls for more easing.
Still, Chinese home prices are mind-bogglingly high, in part because real estate is one of the few forms of investment available to savers in a country where financial markets are underdeveloped.
An I.M.F. paper showed that the cost of an apartment measuring 70 square metres, or about 750 square feet, in Beijing equaled about 20 annual household disposable incomes in 2010, less than Hong Kong’s rate of 24, but far costlier than Tokyo’s 10 or Britain’s 4.5. Across China, the average is 4.5.
Fearing complaints over steep home prices from ordinary Chinese, Beijing has promised not to relent on making it hard or impossible for savers to buy second or third homes in order to snuff out any bubble.
But some fear Beijing’s fortitude will not last, especially if it brings about slower economic growth, a decision made more painful by the cooling of the global economy.
