Nicholas R. Lardy
Well, that’s a very good way of putting it, because I don’t think it necessarily is going to be a crash or the bubble’s going to burst. It could be a long, slow, painful slowdown as they wring out the excesses of the system. There are a lot of similarities between Japan from the late ’80s to the early 2000s and the current situation in China: high levels of investment, too much reliance on exports, undervalued currency, and a certain amount of financial repression. So I think it is a challenge for China to move ahead.
I think Chinese leaders will be more decisive than the Japanese. Japan has had a period of very, very slow growth for such a long period of time, in part because they were not willing to confront their economic problems. If I had to bet, I think in the end the Chinese will confront their economic problems. They will address the problems in the banking sector. They will move to get rid of these distortions so that they don’t fall into a decade-long growth slowdown like Japan.
Chinese leaders have to make these changes. When Japan ran into economic difficulty it was already a very rich society with very high living standards and levels of consumption. By comparison, China is a very, very low-income economy. Looking beyond per capita GDP, per capita disposable income of urban residents is only the equivalent of about $3,000, which is teeny compared to where Japan was fifteen years ago.
So the stability of the whole system and the continued dominant role of the Chinese Communist Party will ultimately depend on sustaining reasonably high rates of economic growth. Once its widely appreciated that there is risk of a sustained, long slowdown, I think Chinese leaders will mobilize support to overcome the vested interests and undertake the necessary reforms.