1960-1990 was era of the Asian Dragons: Japan and the “little dragons” Taiwan, Korea and Hong Kong. For decades all four enjoyed double digit annual economic growth, but Japan was the great economic dynamo.
In 30 years, Japan moved up from a bombed-out hulk to become the world’s second largest economy. State Capitalism was the new religion and the Japanese MITI (The Ministry of Trade and Industry) was its temple.
Learn from the Japanese was the new mantra. The experts wrote thousands of books teaching us the Japanese way of doing business. These were eagerly gobbled up by business executives in London and New York who threw-off their three-piece suits, donned judo-gi and joined their local friendly neighborhood dojo where they studied the mysteries of Zen and Bushido. Heroes such as Kusunoki Masashige and Miyamoto Musashi replaced the now redundant Henry Ford, Thomas J. Watson and J.P. Morgan.
The Japanese were taking over the world. Japanese property values sky-rocketed. By 1989 the public lavatory at Asakusa-Bashi was worth more than the entire state of Montana. The Japanese stock market reached undreamed of heights. On 29 December 1989, the Nikkei stock index closed at 38,915. The Japanese economic juggernaut was unstoppable
Then it stopped. There was this great hisssss heard round the world, as if someone had let the air out of some gigantic balloon and the Japanese economy imploded.
The catch words of the 70s and 80s dragons were replaced by a new vocabulary describing new reality — deflationary spiral, zombie business, bubble economy . For the next 20 years Japan remained in a state of secular decline. On 10 March 2009, the Nikkei finally bottomed out at 7055, down 82% from its peak.
What went wrong? The experts (often the same experts) wrote a thousand more books on the subject. Their consensus recognized four factors
- Government encouraged its citizens to save rather than spend, which led to easy borrowing which in turn led to aggressive speculation.
- Speculation led directly to asset bubbles — property and stocks.
- High tariffs, non-tariff barriers and export subsidies which led to over reliance on exports rather than domestic consumption
- Over reliance on capital investment and infrastructure.
The result was economic collapse, although we must admit that Japan had a 30 year run before the disaster.
Japan had fallen, replaced by China.
Out with Zen and Bushido. In with Confucianism and Taoism. New heroes: Sun Tsu, Mencius and Deng Xiaoping. And of course few thousand more books (yet again written by the same old experts)
However, before running out to buy the new books, and replacing your three-piece suit with a Mandarin robe consider the following.
Some things never change, which might just be the problem.
Just how different was Japan’s 1980s version of state capitalism than today’s version of China’s state capitalism?
The four factors which we are told led to the Japanese collapse have been embraced by the Chinese leadership. Loose lending; asset bubbles; import restriction coupled with export subsidies; over reliance on capital investment and infrastructure. The Japanese disease has found a new victim
However, in the Chinese version, the disease has mutated adding new even more virulent symptoms.
To maintain their positive balance of trade the Chinese government has resorted continual currency devaluation which means buying up all the foreign currency that comes into China at an artificially inflated rate. This is the same as flooding their own economy with literally trillions of RMB. The inevitable result has been inflation.
The efforts of the Chinese government to curb inflation through monetary policy — increased interest rates and limiting official bank lending — has only increased inflationary pressure.
Increased interest rates has increased the flow of foreign currency into the country. After all what better place to put your money than in a country with rising interest rates coupled with a revaluing currency.
Limiting official bank lending has given rise to a parallel informal and uncontrolled banking sector. After all if you have a few billion RMB floating around China what better use for your money than lending it out to AAA companies willing to pay high interest rates.
The faster the economy grows, the greater the trade imbalance, the worse the problem becomes. Monetary policy only aggravates the problem. The real problem is the fundamental contradiction within state capitalism. The bureaucrats, party leaders, and interest groups work for their own benefit. They will not allow any policy change which goes against their individual interests.
Chinese leaders will not and probably cannot allow the policies necessary to cure the economy of the Japanese disease.
No one is going to remove import restrictions.
No one is going to stop export subsidies
No one is going to revalue the Chinese currency
The best that can happen is just what is happening. The Chinese leadership is no longer able to keep the RMB down. The value of the RMB is rising. The only remaining questions are, how much and how long?
The previous revaluation took place over a period of 1074 days between 2005 and 2008 during which time the RMB increased by 21%. This latest revaluation is at day 300 and the RMB has moved up 4.2% against the dollar, somewhat faster than the earlier one and this time it will probably be 25%.
I have no idea what will happen. It is my experience that regardless of the challenge the Chinese invariably survive. They have been doing so quite successfully for the past 4200 years. I see no reason to think this time will be any different
My advice to you bankers and other Masters of the Universe. Do not read the books. Do not learn Putonghua. Most importantly under no circumstance should you buy a Mandarin robe. Instead go directly to Tom Ford or Gieves and Hawkes and order a new three- piece suit, preferably in banker’s grey. You will find it more becoming and a much better fit.