China and the Lure of the Status Quo

China in 2012 is a lot like Japan in the 1980s.


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."

Nor would you want to be a worker at a company that is forced to downsize. Change means uncertainty, unemployment and hardship.

It's particularly hard to embrace change when the old way of doing things has worked so well. Not long ago, the assumption in America was that we no longer had to worry about severe recessions. That assumption held up, until the day in 2008 when it didn't.

The Chinese should keep in mind that there are two occasions when a country has to brutally acknowledge its errors and correct them: when it fails, and when it succeeds.

Steve Chapman blogs daily at

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  1. Those dudes really know what is going on wow.

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  2. The current CCP regime is pretty bad, but one can forgive the Chinese for wanting to keep the current status quo. In the last 150 years China was semi colonised by Western powers, torn apart by civil wars, pillaged and plundered by Japan and had Mao (the worlds number one mass murderer) as leader.

    Taiwan is the obvious role model, but with a billion people in the country, getting there will take time, a sudden upheaval will not be good, it will take decades of slow improvements.

    1. The CCP regime is way more libertarian than Western democracies, contrary to public opinion.

      The role model is not US puppet Taiwan, but undemocratically-ruled Hong Kong and Singapore (the most libertarian nations on Earth economically).

  3. OT but China related; a WashPo article about the Chinese leaders sending their children to the most elite US colleges they can afford - and the question of who and how they are paying for the tuition.

    But the best part was a incredibly subversive quote:
    Hong said she sees no contradiction between the desire for an Ivy League education and the current principles of the ruling party and its leaders: "What part of China is communist, and what part of Harvard is against elitist authoritarianism?"

    That's a good question. Someone should ask Obama and the Harvard faculty that question. Surely some part of Harvard is against elitist authoritarianism.

    1. Oh, oh! I know this one! First part of the question - "the top, the princelings and princesses, et al". The second part - "very, very little of it".

  4. A good article, I like it very much.

  5. Some interesting china related linkage:

    Chinese companies defaulting on coal and iron contracts. A sign of the begining of the end for china?

  6. I have what may sound like a stupid question, but why do we trust statistics coming out of communist countries to be factual?

    1. Because we trust statistics coming out of our socialist country to be factual.

      1. It's only fair...

  7. Paging Mr. Friedman!

  8. 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.

  9. Two huge differences between the Chinese real estate bubble and the recent one in the US (or Japan of the late 1980's for that matter) - a) pre-bubble prices in China were a tiny fraction of current prices and b) a huge percentage (70-80%) of buyers in China did not purchase to inhabit.

    Also, there is a high probability that most investors in Chinese real estate will walk away if the property value drops too far. All these factors point to a scary ride into a smoking hole in the ground if the bubble breaks.

  10. China will not fail for the following reasons:
    a) an average IQ of 105 with eugenic policies like one-child (only the smart, therefore rich parents can afford to pay the fine -tax- for having a 2nd child); the US and Europe have rampant dysgenism due to an overextended welfare state that shifts resources from the childless smart people to the fertile dumb, also a lot of immigration of populations with a lower average IQ than that of the White majority (BTW, average population IQ is the greatest single predictor of a country's GDP beside economic freedom)
    b) an actual economy that produces tangible stuff, like electronics. China can put the US and Europe in a world of hurt by simply stopping exports.
    c) a culture that values earning money and working hard above many other things.

    Also, Japan's "lost decade" was greatly exaggerated. Japan is still a safer, better country to live in than most Western countries. And it still has a culture of its own, unlike the US and Europe, so I'd bet on Japan rather than White countries economically in the long run.

    1. typical trash coming from the mouth of the wumao dang. the chinese sure did use their IQs to their advantage as they contributed nothing to the modern world in the last 500 years. the chinese haven't stolen enough technology to go it alone they still need a lot of investment. no one in china (i know, because i live here) will buy a chinese good when they have the option and abiltiy to buy a foreign good. their domestic products are shit and will continue to be because copiers are always a step behind and the education system discourages creativity and critical thinking. 63 million houses sitting empty, its going to be a shit storm here soon. ?????????

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