Could China Become Like Japan in the Early 1990s?

Chinese leader Xi Jinping has fixated on the 1990s collapse of the Soviet Union and how to avoid the same fate for the Chinese economy. Would he instead have done better to study Japan and its lost decades beginning in the early 1990s? Should Xi now be thinking about the implications of his country's massive debt, declining trade surpluses with the United States and Europe, and collapse in mortgage borrowing, not to mention China's dismal demographic outlook and other challenges?

Should the rest of the world be worried about the loss, or potential slowdown, of one of the major global growth engines? Chinese officials, meanwhile, are spinning a much more encouraging scenario. What do you believe?

WILLIAM H. OVERHOLT

Senior Research Fellow, Harvard Kennedy School, and author, China's Crisis of Success (2018)

In a 2018 book, China's Crisis of Success, which foreshadowed many of China's current problems, I highlighted the risk of Japanization which is a slowing of development caused by a coalition of traditional industrial conglomerates and politicians that inhibits reform, competition, innovation, and internationalization. Xi Jinping has heightened the risks in several ways. He wants the core of the Chinese economy to be dominated by a group of big state firms. He expects innovation to come heavily through subsidies to those firms. The Party Committee has been given veto over strategic business decisions in every firm. Bank finance has been consolidated in giant firms that cannot fund local private firms in a creditworthy fashion. Xi has immobilized a previously innovative state/Party bureaucracy through omnipresent fear of politically tinged accusations of corruption. Xi's China seeks industrial self-sufficiency. Control over the allocation of research funds has been given to Party secretaries whose interest is the opposite of disruption. Scholarly exchanges with the foreign world have been inhibited, and the educational and career value of learning English has been reduced.

But China retains key advantages. China has facilitated the emergence of innovative small and medium-sized enterprises whereas Japan has inhibited them. China has facilitated the social transformation from a manufacturing economy into a services economy whereas Japan's giant industrial conglomerates have the political clout to slow that transformation. Chinese society has remained far more outward-looking than Japan's. Frustrated, ambitious Chinese students go abroad; Japan's stay home. Chinese scientific scholarship is competitive and internationally collaborative in a way that Japan's isn't. Chinese elites speak English (and other languages) and thus have access to foreign ideas to an extent that Japanese counterparts don't. China's economy is open to GM and thousands of other foreign firms on both the supply and demand to a degree that Japan's isn't. Despite Xi's changes, these advantages remain strong.

But Xi has put crucial Chinese advantages at risk. One of China's greatest advantages has been its adaptability. Each leadership team (Mao/Deng/Jiang/Hu/Xi) has changed the country's politics and economics drastically to correct the failings of its predecessor. Xi has interrupted that process of change and correction, but we do not yet know whether he has curtailed adaptability or just interrupted it temporarily. Another Chinese advantage has been the sense of mobility, of everything getting better for everybody. Japan had that through the 1980s, but then decades of near-stagnation imbued Japanese youth with hopelessness. Why venture abroad or aspire to disruptive innovation when one's whole life experience is deadening? China is now where Japan was in the 1970s. As China's growth becomes slow, as the Party elite congeals, as fear quiets the intense debates about everything that have characterized Chinese society, the risks of Japanization will grow.

The Chinese response to economic and scholarly deadening is the opposite of Japan's. The Japanese stay home and don't sally abroad in search of greater opportunities. In contrast, most Chinese middle class and elite families want their money, their children, and often themselves out of China. Beijing risks losing its most creative minds and business ideas through repression in a way that Japan doesn't, but the Chinese exodus also feeds a vast global feedback loop that historically has facilitated revitalization. We are still in a long cycle whose early phase was driven by expatriate Sun Yat-sen. China's great economic takeoff of the past four decades is part of a shorter cycle driven by Deng Xiaoping's awareness of the four little dragons' successes together with the capital, business acumen, and money of Hong Kong, Taiwan, and the overseas Chinese networks.

DEREK SCISSORS

Senior Fellow, American Enterprise Institute

Xi's desire to avoid the Soviet Union's political fate may have perversely encouraged him to make China more like the Soviet Union economically, through increasing centralization. If so, China's economic fate is dismal. Japan still seems the better comparison, however. Japan thirty years ago doesn't fit perfectly well--it was comparatively richer and smaller than present or future China. But Japan failed to address then the same core challenges China is failing to address now.

First, there are similarities in external economic orientation between China 2023 and Japan circa 1993, but they don't matter as much as they might seem to. Large economies should tend to their own houses, not rely heavily on global demand or exchange rate management. If China's goal is to continue to rise, the external-side lesson from Japan isn't to cling to a development strategy suited for a medium-sized follower economy, but to move beyond it.

The obstacles to doing so are the key points of comparison. After its wild stimulus response to the global financial crisis, China's debt burden skyrocketed and was similar in mid-2022 to Japan's in mid-1998, according to the Bank for International Settlements. The demographic situation is better, but only for the moment. The United Nations has China's median age in 2021 matching Japan's in 1992, but also China aging faster from this point than Japan did.

One of Japan's responses to its lost decades was to try to turn to innovation. It didn't work well, and innovating more while aging is a daunting task. China faces an additional obstacle--it doesn't want innovation to erode Communist Party control and is therefore suspicious of a swath of the private sector. To anticipate China outperforming 1990s Japan in innovation, one must believe state direction and resource mobilization can overcome aging, financial misallocation, and aversions to both competition and private property rights.

In light of the emphasis on political control over conventional economic performance, it's unclear how hard China will spin its trajectory. It's currently reporting slow GDP growth but still high job creation, and avoided largescale borrowing during the pandemic. If his domestic position is secure and vital goals are being attained overseas, Xi may be more willing to face up to economic reality than the "experts" who once insisted Japan would return to glory or those touting China now.

Finally, China's record as a global growth engine is more mixed than is commonly asserted. It detracts from the rest of the world's GDP through the trade surplus. It's true that GDP has limited utility and a stagnating China matters to consumer inflation and commodities demand, among other things. But it's misleading and bizarrely simple to just count Chinese GDP growth itself as contributing to the world economy. Fortunately, since Chinese GDP will continue to slow, that's not what matters.

JOSEPH S. NYE, JR.

University Distinguished Service Professor, Emeritus, Harvard University, former U.S. Assistant Secretary of Defense, and author, Do Morals Matter? Presidents and Foreign Policy from FDR to Trump (Oxford, 2020)

In the early 1990s, Americans feared that Japan would surpass the United States. Now we worry that China will, but again the fears are exaggerated.

Contrary to the current conventional wisdom, China is not the world's largest economy. Measured in terms of purchasing power parity, it became larger than the U.S. economy in 2014. But PPP is an economist's device for comparing estimates of welfare, not economic power. Even if China someday surpasses the United States in total economic size measured at exchange rates, GDP is not the only measure of overall power. China remains well behind the United States on military and soft-power indices, and its relative economic power is smaller if one includes U.S. allies such as Europe and Japan.

Nonetheless, the scale of China's economic power will remain important. The United States was once the world's largest trading power and bilateral lender. Today, nearly one hundred countries count China as their major trading partner, while only fifty-seven have such a relationship with the United States. China has lent $1 trillion for infrastructure projects through its Belt and Road Initiative over the past decade.

Moreover, China's economic success enhances its soft power in developing and emerging markets. And China's ability to grant or deny access to its domestic market gives it hard-power leverage. It is too early to bet on "peak China."

A good strategy requires careful net assessment. Underestimation breeds complacency, while overestimation creates fear--either of which can lead to miscalculation. China is a strong country but it also has important weaknesses compared to the United States in terms of economic, demographic, and political problems. Its labor force peaked in 2015, its economic growth rate is slowing, and it has few political allies. It has border disputes with several of its neighbors, especially India which has passed it in total population size. China depends on imported energy that must cross the Indian Ocean, and China's...