in this prediction. The fate of Japan was sealed from the reluctance to abandon a dysfunctional growth model. While the adoption of a radical restructuring on the part of China is what makes it different from Japan, is striving to implement this strategy. If you don’t win in this battle, the outcome will be similar. At the conclusion of the seminar, “lessons from Japan” that I taught at Yale University for the last six years. The course deals with the rise and fall of the modern japanese economy and the importance of this course for other large economies.
The seminar concludes with research articles by students on what can be the next Japan. As in 2012, the most popular choice was the United States, as he was trying to recover from the great financial crisis of 2008. As in 2013, the attention was focused on the ravaged by the crisis in Europe. But this year, more than half of the students of the seminar (13 of 23) have chosen to study if China is the next Japan. An academic environment offers a wonderful spiritual workshop. But a few quick trips in China after the end of the spring semester, he offered a different perspective.
The disproportionate role of chinese banks
In extensive discussions with chinese officials, business leaders, academics and investors, the interest for the lessons that could draw China from Japan was great. The most popular theme right now is the debt. The non-financial debt China has increased from 150% of GDP in 2008 to 255% today, with two-thirds of the increase coming from the business sector, and particularly state-owned enterprises. Because this is an economy saving, this causes surprise. These economies tend to invest and the lack of reforms in China highlights the disproportionate role of banks in the chinese investment boom.
The comparison with Japan is particularly useful for the assessment of the risk of a development with a high debt. Almost 390% of the japanese GDP by the end of 2015, the overall ratio of debt of Japan is 140% higher than that of China. But because Japan has a high degree of savings – on average 24% of GDP since 2007 – in fact, the debt belongs to the same. This means that it is vulnerable to flight of capital of foreign investors, which often triggers seizures. With the savings rate in China is more than twice that of Japan’s since 2007, this conclusion applies for the same. The fear at the beginning of 2016, China’s economy did not take into account this factor.
Risk of business-zombie
The business zombie is still a matter of debate in China. Key players in the first lost decade of Japan in 1990, the business-zombie kept alive with non-performing loans, which eventually weighed on the japanese banking system. The chinese officials, in contrast to the Japanese who were in denial for over a decade, have recognized the problem. Two and a half lost decades are not a result which the Chinese wish. But to know what they want is not enough to ensure that China will not fall in its own japanese-style trap. The reforms are the decisive factor.
The failure of Japan to adopt structural reforms prevents any recovery effort. On the contrary, the strategy of China underlines the urgent need for reforms. In the end, the success or failure will depend on the will of the chinese leadership to face up to the interests who oppose the reforms. It is interesting that 13 of the students in my seminar who said that China is the next Japan, two-thirds at the end abandoned the comparison. They argued that the lessons of modern China is more important than the lessons of Japan. And they got good grades.
Mr. Stephen S. Roach, a former chairman of Morgan Stanley Asia and a financial analyst, is a fellow of the Jackson Institute of Global Affairs, University of Yale, and professor in the School of Management of Yale.
Stephen S. Roach
Source
Is China the next Japan?
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