Against the backdrop of deflation in China's economy, there are some people who have started to repeat the same old tune:Will China repeat Japan's mistakes?
Some argue that China's economic growth model is similar to Japan's, which has led Japan and other Asian countries to phenomenal growth in a short period of time. But in the long run, this pattern seems inevitably heading towards the same ending:Large-scale overinvestment and capital misallocation will eventually lead to a difficult moment of economic adjustment. Therefore, China needs to remain vigilant.
This view suggests that China may be facing a recession similar to that of Japan, especially after more than three years of sustained decline in the property market. However, this assertion was made as early as 2010, when China's economy was only half the size of what it is today, and residential real estate investment was still growing at a three-fold rate every year.
Obviously, some analysts tend to jump to conclusions, but the reality is far more complicated than theirs.
Japan, once a model for global growth, has unfortunately fallen into secular stagnation. In stark contrast, the Asian tigers – South Korea, Taiwan, Hong Kong, and Singapore – have not only surpassed Japan in terms of GDP per capita, but have also demonstrated remarkable economic resilience and adaptability.
After the 1997-98 Asian financial crisis, South Korea transformed into a chaebol-dominated economy and successfully climbed to the top of the economy. Taiwan Province has consolidated its economic strength through economic integration with Chinese mainland and its leading position in the semiconductor industry. Although Hong Kong has underperformed in recent years in terms of housing investment, its position as a ** and financial centre remains solid. Singapore, with its efficient economic model, has a per capita GDP (PPP) of 2 of Japan's6 times.
Although the Asian tigers are also facing the challenge of declining birth rates, this has not prevented them from surpassing Japan economically. Ageing populations remain, but their dynamism and innovation provide a strong impetus for continued growth.
The situation in China is more complicated. Although its birth rate was once higher than that of Japan and the Asian Tigers, the increase in the number of students and the coronavirus pandemic have led to a decline in the birth rate. China's population under the age of 20 accounts for 233%, 65 years and above accounted for 146%, which is lower than that of developed countries, showing demographic advantages. However, the challenges ahead should not be underestimated.
Over the past few decades, China's booming economy has been in stark contrast to Japan's gradual recession. China's development trajectory can be likened to a consistently upward 45-degree sloping line, a trend that is reflected in a number of areas, including domestic and foreign patent applications, the number of scientific journal articles published, and the citation rate of scientific articles.
While China is unlikely to face a shortage of young professionals in the next two decades, it remains to be seen whether the trend in the birth rate and the number of university students will remain stable in the post-pandemic era. Compared to other economies in Asia, China's risk of experiencing Japan-style population stagnation is extremely low.
Japan's economic losses in recent decades have been generally underestimated, with the degradation of its human capital being one of the main reasons. In 2022, although the number of students in the four undergraduate programs doubled, the number of science and engineering specialists remained the same as in 1990. With a declining young population, higher education institutions in Japan have shifted to offering junior college courses since the mid-90s. By 2013, the percentage of students choosing to study science and engineering had dropped significantly, in part because students turned to other fields such as medicine.
The cumulative effect of Japan's talent shortage and the loss of students in STEM fields has led to a decline in the quality of scientists and engineers produced. Japan's graduate school graduation rate, which peaked in the 1970s, is now in a turnover mode, with more and more less capable specialists graduating.
By contrast, China's tertiary enrolment rate is still rising. In 2022, 34% of 18-year-olds went on to undergraduate studies and 29% studied at tertiary institutions. If this trend continues, China's highly educated labor force will quadruple over the next 30 years. In the field of science and engineering, the proportion of Chinese students is much higher than that of Japan, which indicates its future development potential.
Looking back at history, we see that the Plaza Accord, imposed by the United States in the 1980s and 1990s, had a profound impact on Japan, leading to the collapse of Toshiba and "voluntary" export quotas in the automotive industry. These events marked a long recession in Japan in the financial, economic, and social spheres.
Mismanagement of asset bubbles, overprotection of the service sector, and the presence of zombie firms have all had negative consequences for Japan. Given the Plaza Accord's restrictions on the yen and the waning role of industrial giants, Japan finds itself in a much worse position than it once was.
The loss of vitality in Japan can be compared to a person who grew up in a "bonsai" style and tried to solve the problem by reducing their ambitions, withdrawing from society, becoming a "herbivore" (celibate), and even marrying a kawaii anime character. Despite the increase in the number of universities and the rise in the proportion of the population in Japan, these measures have not been able to compensate for the decline in the young population and low morale by transforming young people into a highly skilled workforce. As a result, Japan's position in the fields of science, technology, and industry has declined sharply.
With regard to China's economic development, despite concerns that it could repeat Japan's mistakes, China is a completely different country today than it was in 2010.
China's similarities to Japan may be limited to the property bubble, but for China, this seems to be a controlled process so far.
In the next two or three decades, China will welcome a large number of dynamic young scientists and engineers, who will become the backbone of leading companies such as CATL, BYD, DJI, and BOE.
Analysts who focus on dissecting the balance sheets, investment-consumption balances, and official debt of Chinese property developers may overlook other trees in the economic forest. While funding is crucial, as the experiences of Japan and South Korea show, China's rise has always been inseparable from the deep accumulation of human capital. In any economy in the world, talent has always been the most valuable resource.