China and Japan have ended up on very similar economic trajectories, since both countries emerged from relative obscurity to become major powerhouses through aggressive reforms and investments. In the process, the nations each have accumulated huge amounts of debt and asset bubbles. In the 1990s, the situation became unsustainable in Japan and the nation entered a period known as the “lost 30 years” characterised by economic stagnation, weak consumer demand and lower birth rate. China, after…
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00:00 Olympic Games, high-speed railways, never-ending construction projects,
00:05 world-dominating manufacturing powerhouses. As they emerge from periods
00:11 of decline, China and Japan have been on similar paths of economic development.
00:16 Though the changes have taken place 50 years apart, many economists are now
00:22 seeing parallels between the bursting of Japan's bubble in the 1990s and the
00:27 growing economic growth seen in China today. So just how crazy was Japan's
00:34 bubble economy? And is China going to be another Japan?
00:40 To answer these questions, we must go back in time to Japan in 1946. World War
00:47 Two had just ended and Allied air raids, including two atomic bombings, left Japan
00:53 in wounds. The US-led allies dismantled many pre-war Japanese business
00:59 conglomerates known as "daibatsu," which were the core of the country's war
01:04 machine. Bureaucrats in Tokyo were forced to start again from scratch, and the
01:10 government started prioritizing resources to rebuild raw material industries.
01:16 Steel, coal, and textiles operations received government loans and subsidies.
01:22 Then in the late 1940s and 50s, the onset of the Cold War and the Korean War flooded
01:30 Japan with economic aid and military orders from the United States. These
01:35 factors paved the way for Japan's economy to go through exponential growth in the
01:41 years that followed. From 1960 to 1976, Japan's GDP grew from 44 billion US
01:50 dollars to more than 580 billion US dollars. In 1968, Japan emerged as the
01:59 world's second largest free market economy, behind only the United States.
02:04 Over the next decade, Japanese car makers such as Toyota and Honda went on to beat
02:11 US car makers by supplying affordable, well-built cars, and electronic brands
02:17 like Sony and Panasonic became symbols of innovation worldwide. America's trade
02:23 deficit with Japan increased from 15.1 billion US dollars in 1982 to 58 billion
02:31 US dollars in 1986, or one-third of the overall US deficit. US leaders made clear
02:39 they did not like it, through a response much like what China will hear decades
02:44 later. Our patience with unfair trade isn't endless, and we're taking action to
02:49 bring other nations back in line to ensure that free trade remains fair trade.
02:54 We're aggressively using existing trade laws to pry open foreign markets and
02:59 force others to play by the rules. This week, for instance, we signed a
03:04 breakthrough trade agreement that will open up Japanese markets to US
03:07 semiconductors and prevent the Japanese from dumping semiconductors in our
03:13 markets. Finally, in 1985, Japan's leaders agreed to allow the yen to appreciate
03:20 against the US dollar. The Plaza Accord, reached at a trade summit in New York's
03:25 Plaza Hotel, left Americans hoping that maybe, just maybe, a weaker dollar would
03:32 make US goods sell better overseas. While that didn't happen, the deal did trigger
03:37 an exceptionally large appreciation of the yen, a 46% rise against the dollar by
03:44 the end of 1986. A more expensive yen was not good news for Japan's export sector.
03:50 To stimulate the economy, the interest rate was dropped from 5% in 1985 to
03:57 about 2.5% in 1989. The government also introduced a 43 billion US dollar
04:05 stimulus package in 1987. So, what happens when you pour that much money into the economy?
04:30 Television ads for an energy drink reflected the brash confidence many felt
04:35 about Japan's economy. Banks were eager to lend money to pretty much everyone,
04:41 and borrowers used the funds to purchase more land, which was then used to secure
04:47 more loans from the banks. By 1986, land prices in Japan had increased by as much
04:54 as 5,000% from what they were 30 years earlier. At the peak of the bubble economy,
05:01 Tokyo real estate was selling for as much as 139,000 US dollars per square foot,
05:09 nearly 350 times as much as it costs in New York's Manhattan. By that reckoning,
05:16 Tokyo's Imperial Palace was, at the time, worth as much as the entire US state of
05:23 California. Japan's buying frenzy was also seen overseas. In 1987, a Japanese
05:30 insurance company bought Vincent van Gogh's Sunflowers for 80 million US
05:36 dollars and showed the painting to the royal family. The Mitsubishi Group bought
05:41 New York's Rockefeller Center in 1989. That same year, Japan's Sony acquired
05:47 American film production company Columbia Pictures. It wasn't just the
05:52 Japanese who wanted a piece of the action. Just look at this advertisement
05:56 from the South China Morning Post in 1989. It said a 5,000 US dollar
06:03 investment in the fund in 1986 would have grown to more than 58,000 dollars
06:10 by 1989. Those prospects would only look better since the Nikkei index rose to
06:18 almost 39,000 later that month. Some investors argued that Japan's stock
06:24 price was so high it was almost in outer space. One Japanese stockbroker joked
06:29 Newton's law of gravity doesn't exist in Japan's stock market. About 30 years later,
06:35 when the Shanghai stock index jumped in 2015 to about 5,000, the Chinese Communist
06:43 Party mouthpiece People's Daily announced that a bull run had begun. The
06:47 newspaper said China has no tradition of bubbles or even dynamics to make one. Of
06:53 course, when stock markets keep rising, such remarks seem to reflect human
06:59 nature. And unfortunately, Newton's law did eventually pay a visit to the
07:04 Japanese market. Enter Yasushi Miyano, the new governor of the Bank of Japan.
07:14 When Miyano took office in 1989, he sensed that Japan's economic growth was
07:20 unsustainable. What did he do? He poured buckets of iced water on the red-hot
07:27 iron that was the Japanese economy. Japan's central bank boosted the interest
07:32 rate all the way from 2.5% in 1987 to 6% in 1990. Stocks and real estate went into
07:42 a tailspin. Japanese companies, banks and individuals soon found themselves
07:52 drowning in bad debts because the properties they held were worth just a
07:56 fraction of what they cost to buy. Companies and banks went bankrupt.
08:02 Consumers didn't want to spend. More people lost their jobs. The suicide rates
08:07 went up. The government tried to stimulate the economy by investing in
08:13 infrastructure. But since many essential roads and bridges had been built decades
08:19 earlier, stimulus often gave rise to roads and bridges to nowhere, as well as
08:24 debts and government deficits. In short, Japan has spent the last three decades
08:30 trying to shake off a post-bubble hangover. But as one country licked its
08:37 economic wounds, another star was rising on the world stage. It is the well-known
08:43 tale of China and its economic miracle sparked by a reform and opening up
08:49 policy introduced in December 1978.
08:54 And on the surface at least, stories about China's boom times bear some
09:00 resemblance to what was seen in Japan. Chinese companies had started to slap
09:07 up overseas assets such as Swedish car maker Volvo. The US meanwhile soon grew
09:13 unhappy about its trade deficit with China and Beijing's hefty subsidies in
09:18 the manufacturing industry. More recently, bilateral relationships became mired in
09:24 a bitter trade war. There have also been ups and downs in the Chinese economy, but
09:29 the Beijing government has been swift and calculating in dealing with them.
09:34 When the 2008 global financial crisis threatened to derail the Chinese economy,
09:39 which depended heavily on its export sector, China rolled out a 4 trillion yuan
09:45 stimulus package to jumpstart the economy. And it worked. The country's GDP
09:50 growth soon returned to double-digit levels. And remember the 2015 China stock
09:55 market rally we mentioned earlier? The bubble did burst in the end, but unlike
10:00 what happened in Japan, Beijing authorities rolled out a slew of
10:05 support measures. Interest rates were cut and officials mobilized brokerages, asset
10:11 management companies, public pension funds, and even the central bank to give
10:16 the market more ammunition. That's not to say there were no problems. China has
10:21 been relying on the real estate sector and government spending on
10:25 infrastructure to generate substantial economic growth. But the industry and
10:30 local governments have racked up substantial debts that pose risk to the
10:35 overall Chinese economy. The government tried to defuse the threat by
10:40 introducing a free wetlands policy. It tightened funding conditions for 12
10:46 major property developers and set caps on the amount of debts they could hold
10:51 in relation to cash on hand, the value of the assets, and as a proportion of
10:56 equity in their businesses. The central government has also promoted programs
11:01 like loan restructuring to help reduce the burden on local governments. Beijing
11:08 has also punished officials for seriously affecting the effectiveness of
11:12 the prevention and resolution of hidden debt risk. Despite all the apparent
11:17 problems in the economy, Chinese authorities insist they remain in
11:22 control. So why are people asking, is China becoming another Japan?
11:27 "Weaker economic data in China." "The housing market in China just continued to get worse."
11:31 "The COVID rebound doesn't look as though it has a whole lot of momentum."
11:35 "Accumulation of 12.8 trillion dollars of debt." The news headlines coming out from
11:41 China these days mirror what Japan saw as its woe stipend in the 1990s. The
11:47 world has high hopes for a post-COVID rebound after the lifting of harsh
11:52 lockdown measures at the end of 2022. Though China's GDP expanded 3%, the
11:59 nation still missed its official target of around 5.5%, and the country's
12:06 recent economic figures have been worrying. Compared to the first quarter
12:11 of 2023, China's GDP rose by only 0.8%, down from the rise of 2.2% in the
12:20 first three months of the year. That will ignite the concern that China's debt
12:25 problems and bursting of the real estate bubble will trigger a Japan-style
12:30 recession. But some experts believe that China and Japan's economies are not a
12:36 good comparison. "China is now facing some problems in the process of a new and old dynamic transition."
12:43 "So after the real estate bubble in Japan broke out, the entire economy was in a recession."
12:49 "Almost all the main assets and represents of the economy fell, including the economy."
12:54 "There is still a fundamental difference." "Now, in terms of overall corporate investment and industrial investment,"
13:02 "the development speed of the new industry is far beyond market expectations."
13:10 "But some traditional industries, including some traditional fields, are facing great challenges."
13:17 Chinese economists suggest that there is still untapped potential in China's
13:22 service sectors that could generate growth. Although many sectors of China's
13:26 economy were open for private investment, service sectors including medicine,
13:31 telecoms, education and finance still have relatively high barriers for entry.
13:37 "In fact, whether it is investment or consumption in the service sector,"
13:42 "it is a big momentum and potential for China's future growth."
13:45 "If we can reduce the market entry in the service sector,"
13:51 "for example, we can expand the entry of foreign capital in many sectors,"
13:56 "then we can further stimulate the market momentum and potential."
14:03 Western economists are less optimistic about China's future growth potential.
14:08 But they were also on board with the idea that a robust private sector
14:12 could be the real game changer for getting China's economy bouncing back.
14:17 "And if economics worked according to that kind of theory,"
14:23 "then nobody would be poor, right? So Africa would be really rich,"
14:28 "because they have so much development potential."
14:31 "You can achieve very good things in engineering and science,"
14:34 "but really what you need is you need the boring bits of the economy,"
14:39 "like retail, wholesale, distribution, transportation."
14:44 "The boring bits of the economy have to thrive as well as the sexy bits of the economy."
14:50 "And to do that, you really need to have very, very strong private sector,"
14:58 "very, very strong institutions like good regulation, rule of law,"
15:06 "strong competition policy."
15:10 "You have to attack concentrations of wealth."
15:13 "You should not tolerate high levels of inequality."
15:18 It seems clear that China's leaders are determined
15:21 not to let the country go down the same path as Japan.
15:25 But Beijing cannot go back to the old path of fielding growth
15:29 through real estate and infrastructure investments.
15:32 Institutions like the World Bank have said China's old growth model
15:37 has largely reached its limits.
15:39 The country, they said, must shift its economic structures
15:43 from manufacturing to high-value services
15:46 and from investment to consumption.
15:49 The Chinese government has introduced policies to stimulate the economy,
15:54 such as easing mortgage rules for homebuyers and cutting interest rates.
15:59 The National Development and Reform Commission also introduced a plan
16:03 focused on reducing business costs for goods and services
16:07 in hopes of triggering more spending.
16:10 But it said little about raising income and employment levels,
16:15 finding a way to put the nation back on a path towards development
16:19 will be a touchstone to judge the wisdom and resolve of China's leaders.
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