BEIJING—A rising Asian power with an unstoppable export machine, rapidly growing wealth and a sense that our time is past and its time has come: China in 2012? Yes—but also Japan in the 1980s.
Back then, many Americans thought Japan was destined to dominate the world economically. Japanese leaders had the same idea, and some were not reluctant to let Americans know. But the past is not always prologue. When things go well, they can distract from things that can go wrong.
Japan got blindsided. The magic formula stopped working, and the country couldn't find a new one. Its economic fortunes have come to be summarized in bleak phrases: the lost decade, the great stagnation.
It's not the world's biggest economy, as people expected. In fact, it's gone from No. 2 to No. 3, falling behind China.
Over the past 30 years, China has been an economic success story without parallel in modern history. By abandoning the disastrous policies of Mao Zedong's era and embracing the market, it attained growth averaging a stunning 10 percent a year, lifting hundreds of millions of Chinese out of poverty. It became the world's biggest exporter.
But all is not well. Thanks to the malfunctioning economies of the United States and Europe, demand for China's exports is shriveling. Under pressure from Washington, it has had to let its currency decline, which puts a drag on its sales abroad.
Inflation is up and could soon approach double digits. Growth is down—and anything the government does to combat rising prices may depress it further.
Meanwhile, the real estate market, says Tsinghua University business professor Patrick Chovanec, "is in the process of crashing." That process, as you may recall from the U.S. experience, can wreak havoc on banks. In the first quarter, GDP rose at the slowest rate since 2009.
Not all of the country's troubles are economic. The national leadership transition scheduled for this fall has been thrown into turmoil by a scandal involving a powerful member of the Politburo, former Chongqing Communist Party chief Bo Xilai. A blind dissident embarrassed the government by taking refuge in the U.S. embassy.
Domestic discontent is increasingly public: In 2011, there were an estimated 100,000 organized protests in various places, or more than 250 a day. The government felt the need to crack down on dissent to make sure the Arab Spring did not spread east. But the rise of mobile communications and social networks has left the censors constantly playing catch-up.
Having abandoned the communist ideology of the past, China's rulers have managed to retain power partly by delivering ever-increasing prosperity. If the economy suffers a "hard landing," the people may be less willing to indulge autocracy.
A serious slowdown of that kind is no longer out of the question. China can't keep selling abroad if the rest of the world can't afford to buy its goods.
It's common wisdom in Beijing that the economy needs to shift away from its traditional engines, exports and investment, and toward greater consumer spending at home. But saying it and doing it are not the same things.
Americans, after all, know they need to put the federal government on a sustainable fiscal footing to avoid runaway debt or crushing tax increases. But that understanding hasn't yet forced the budget choices that must be made. We find it easier to put off the pain in hope of a miracle.
China faces the same temptation to avoid what needs to be done. Chovanec explains why: "The shift is disruptive at a micro level. There are winners and losers. You wouldn't want to be an exporter or a real estate developer or a heavy equipment manufacturer."