China and Japan

It looks like China is following the Japanese experience EXACTLY, with a time-lag of around 30 years. Both started out as agricultural economies which industrialized very rapidly on the back of a high savings rate. When Japan’s industrialization completed and its working-age population peaked, the economy suddenly needed A LOT less capital. The enormous excess savings went to the only place they could - into the real estate sector, where they produced the most epic real estate bubble of all times, which popped around 1990 and was followed by 30 years of deflationary low-growth, which would have been much worse if not for the massive deficits the government was running.

Due to the rapidly decreasing working-age population (about 8% over the last ten years), and the shift of the economy away from capital-intensive manufacturing to capital-lite services, the Japan’s need for capital shrunk dramatically, which drove down the “natural interest rate” (NIR) to below zero, making monetary policy very difficult and requiring large government deficity to soak up the unneeded capital.

China is exactly in that same position. Its industrial revolution is over, the share of industrial employment peaked ten years ago. Its working-age population is shrinking, a process which will accelerate considerably over the next ten years.
And it has a truly awesome real estate and credit bubble, one that appears worse every time I look at it.

When Japan’s bubble popped and its banks started going insolvent, it bailed them out by forcing solvent banks to merge with insolvent ones in the so-called “convoy system”. This unfortunately largely crippled the financial sector, which was very bad for the economy.

Now I’m reading rumors that local Chinese authorities are doing the same thing. They’ve gotten the order from Bejing to fix the problem of insolvent real estate developers, incomplete projects and struggling lenders, but they don’t have the means to do so, in particular during difficult economic times. So forcing/cajoling solvent entities to take on/otherwise fund the bad entities makes sense from the viewpoint of a local official who just wants to kick the can down the road because he doesn’t want to be the first whose province is singled out by Beijing for being a problem.

So, that’s where China’s at. It’s Japan circa 1992, except with dumber leadership and a much larger military. When you look at what Xi Jinping is saying and doing, it’s obvious that he is much more interested in preparing for a war against the US over Taiwan than in dealing with the massive and very complex real estate/credit crisis.

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It looks like China is following the Japanese experience EXACTLY, with a time-lag of around 30 years.

I figured it would happen, these economic miracles are hard to keep up specially when your expectations exceed your capabilities.

Hubris and Nemesis are always hard at work.

The Captain

Cancelled - Dubai’s Palm Islands
https://www.youtube.com/watch?v=tdExZj3JBc0

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When you look at what Xi Jinping is saying and doing, it’s obvious that he is much more interested in preparing for a war against the US over Taiwan than in dealing with the massive and very complex real estate/credit crisis.


I don’t think it’s a matter of “more interested”, but rather choosing an action that he (thinks he) can control vs one over which he sees no clear path to a good outcome.

Jeff

Xi may not be in power for long. There is an election coming up.

The communists are building up militarily to hold down their own people. While that could mean Taiwan, their own internal chaos is more pressing.

If there is a bloody revolution a goodly number of the 120 million communists could get killed.

The future economy of China will look very different than the successful last 35 years.