Back in the 1990s, and in this century, all the way up through COVID, I traveled extensively to Japan. I got to know leaders in business, government and academia — had lots of conversations, including about China.

They were convinced in Japan, that China — because it was basically following the Japanese model of development — would go through the same shocks that Japan went through. Japan had a dollar shock, an oil shock, what have you, and then a demographic shock? Well,

let’s look at what happened for Japan and how things came apart. In 1971, Japan was really beginning its takeoff. 

An American writer named Herman Kahn wrote a famous book called “The Emerging Japanese Superstate,” which described how Japanese industry was going to take over the world, and basically it did for the next 20 years. But in 1989, that all came crashing down. The Japanese stock market crashed, the country went into what was really a 20, perhaps 30 year period of very, very slow growth.

The Japanese think something similar is going to happen to China, and there’s a lot of evidence that that may actually be happening right now. China has a whole range of problems. For example, they got very little recovery from ending their COVID restrictions. They expected that to lead to a boom — it hasn’t. Their youth unemployment rate is well over 20%. They have deflation, falling prices, at both the producer and consumer level. Their four big state banks are probably insolvent under standard accounting, their local governments are broke, and their property sector is definitely in a bubble.

Well, this now seems to be stopping. Like Japan, the cause was massive over investment, particularly in housing, in infrastructure, and in their export industries. Now, they are facing some push back, just as Japan did on their exports. For Japan, back in the 70s and early 80s, it was their auto exports, which was lead industry. Now it’s high technology. But if your economy is dependent on exports, and others don’t want to buy them, you’ve got a problem.

Well, let’s think about whether history is really going to repeat itself. There’s a saying “History doesn’t repeat, but it sure does rhyme.” And it’s going to rhyme in China, but I think perhaps even worse than it was in Japan. Japan was having fewer children — gradually. China had a one child policy, and in fact, their working age population is already shrinking.

Japan was a conformist society, but really had no censorship; information flowed pretty freely. That’s not true in China. In the business sector, the objective was to try in Japan and become globally competitive. In China, if business people get too uppity and criticize the government, they’re disappeared, like Jack Ma, or some of them end up being taught pushed off of tall buildings — another way of causing someone to disappear. So this is going to be a problem going forward. 

What should they do? Well, if you’re having a problem on your trade front, and you’re having deflation at home, what you should do is reflate and try and devalue your currency in the process. China’s doing the exact opposite. As far as the amount of money they had as a percent of their GDP, in China, it’s actually fallen in the last 20 years from 53% to 33%. In America, it’s gone the opposite way from 21% up to 33%. In Europe, it’s gone up from 17% to 52%, and in Japan, it’s gone up from 52% to 129%. 

Why isn’t China doing what everyone else is doing and what they should do? Well, the answer is there are winners and losers when you do that. And in China, although the country as a whole would be a beneficiary, the people who run the place would be losers of the Cognizant, so to say. What do they do? Well, they buy a lot of foreign luxury goods. That’s how they show they’ve made it, they do overseas travel, also will cost more if they devalue.

Their military, which buys some of its technology, it doesn’t just steal it, will now have to pay more in terms of renminbi if they devalue. And all of those Belt and Road investments were to are designed to hook emerging market economies on lending from China will now be easier to repay. And the collateral which is what China really wants, which is the raw materials, will be harder for China to obtain. 

So the ruling class doesn’t want to follow the easiest path for China to get out of its problem. I think that therefore, when we think about China following the Japan model, ultimately they’re going to be pushed to the same solution because there is no alternative. But they’re going to get there being dragged kicking and screaming. That’s going to be very painful for the country and for the Chinese people.