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Are China’s Economy and Real Estate Headed for a Japanese-Style Recession? Lessons from Japan’s Lost Decades

  Friends continue to recommend to me the book “The Great Recession: The Holy Grail of Macroeconomics” by Gu Chaoming. This book is dedicated to the study of economic recession, especially focusing on the fifteen-year recession in Japan from 1990 to 2005. The book establishes the core concept of balance sheet recession and uses it to explain Japan’s Great Recession, which is quite convincing. More importantly, the analysis of this book aroused my vigilance: Could it be that the economic recessions that Gu Chaoming devoted himself to research are all the affairs of other countries and have nothing to do with China?
one

  China’s and Japan’s economic growth have experienced roughly similar ups and downs, and the formation process and mechanism of asset bubbles are also very similar.
  Since the mid-1950s, Japan has entered the fast lane of economic development. From 1955 to 1970, Japan’s average annual economic growth rate reached 9.8%. In the era of rapid economic rise, Japan once overwhelmed the world’s economic powers such as Germany and the United States.
  In the rising stage of economic growth, Japanese enterprises and residents are overconfident and overly optimistic about the prospects of economic development. Enterprises believe that the Japanese economy will always maintain rapid growth, and wantonly obtain bank loans to accelerate the expansion of production and operation scale, and purchase real estate and golf courses at high prices, etc. Assets: Common people generally believe that housing prices will rise forever, that they will never lose their jobs, and that wages will always increase, so they buy a lot of stocks and houses. This persistent high debt not only promotes the extraordinary growth of the economy, that is, the economy is overheated, but also promotes the continuous rise of asset prices, making it much higher than the economic growth rate, forming a huge asset bubble. For example, between 1955 and 1970, the average annual growth rate of real estate prices in Japan was as high as 21.4%. In 1990, when Japan’s asset prices were the highest, the Nikkei index reached over 40,000 points, and real estate prices were even more ridiculously high. It is said that the real estate price in Tokyo at that time could buy the entire land of the United States, and the asset price of the Japanese imperial palace could buy the state of California in the United States. However, an overheated economy and high asset prices are not sustainable in themselves, and will inevitably arouse strong public dissatisfaction and severe criticism from public opinion, forcing the government and the central bank to tighten monetary policy, leading to the bursting of the bubble. After the asset bubble burst, Japan’s commercial real estate prices fell by 87%, which directly brought Japanese housing prices back to the level of 1973, and the resulting loss of national wealth reached Japan’s three-year GDP, totaling 15 trillion US dollars . The Nikkei also fell from 40,000 points to below 10,000 points many times.
  After Japan’s economic bubble burst in 1990, investment activities came to an abrupt halt and experienced a 15-year recession. According to Gu Chaoming’s explanation, during the era of the bubble economy, companies purchased a large number of assets at high prices. Due to the bursting of the bubble, asset prices plummeted, but corporate debt did not decrease, so a huge deficit appeared on the asset side of the balance sheet. At this time, enterprises no longer pursue profit increase and production scale expansion, but try their best to eliminate the deficit on the asset side and restore the balance at both ends of the balance sheet. , but to maintain the existing scale of production and repay debts with the profits earned by the enterprise. It was not until 2005 that the balance sheets of enterprises were repaired, and enterprises began to borrow money again, expand production scale, and the economic recession ended.
  After the publication of Deng Xiaoping’s Southern Talks in 1992, and especially in 2001 when my country formally joined the World Trade Organization, my country’s economy entered a period of rapid growth for more than two decades, during which the economic growth rate exceeded two number. At the same time, since the second half of 2009, real estate prices have continued to rise. Even during the slowdown in economic growth in the past ten years, they have not stopped rising, and stock prices have risen to more than 6,000 points, forming a serious asset bubble. .
  Compared with the situation when Japan’s asset bubble burst and began to enter an economic recession, the situation in my country is not only different, but also has many similarities. The differences include: First, the bubble in my country’s stock market has dropped from the peak of 6,000 points to the current point of more than 3,000 points after years of fluctuations. The bubble has basically been squeezed out, and there is no longer the risk of a stock market crash. This is different from the situation in Japan at the time. Second, due to the three consecutive years of the new crown epidemic, not only has the economic activities in most parts of the country been severely hindered and the economic growth rate has declined, but it has also led to the outflow of foreign capital and the relocation of foreign companies. The lack of business confidence may become another important factor in the economic recession. triggering factors; similarities include the following aspects: First, the real estate market bubble is still serious. The real estate bubble can be judged from the ratio of the housing price to the average annual income. In 1990, the data of Kyoto, Tokyo, Kanagawa, and Osaka were 18.36 times, 18.12, 15.32, and 13.87 times respectively. In 2021, my country’s Shenzhen, Beijing, Shanghai, and Guangzhou City data are 57.97 times, 55.80 times, 45.55 times, 40.76 times (Nikkei Chinese website, 2022). Second, although loan interest rates are currently kept at a low level, corporate lending enthusiasm is insufficient, and the growth rate of investment has dropped sharply. The average growth rate of fixed asset investment in 2020 and 2021 is only 3.9%. Although the bank loan data shown by the statistics is not ugly, in fact, many companies have borrowed money from the bank before depositing it in the bank, but they are just idling and have not entered the field of production and operation. Third, since 2018, an important direction of China’s macroeconomic policy has been deleveraging. As a result, many well-known real estate companies have broken their capital chains, and real estate companies such as Evergrande have entered bankruptcy liquidation procedures one after another. Private developers almost no longer acquire land, residential sales have dropped sharply, and the phenomenon of abandoning houses is becoming more and more common. These are all dangerous signals, indicating that the real estate bubble is on the verge of bursting. Fourth, Japanese companies held assets crazily during the period of rapid economic growth. Unlike Japanese companies, Chinese companies were not as seriously dragged down by their balance sheets as Japanese companies. What drags down China’s economic growth may be the huge debts of Chinese residents (housing loans alone amount to 5 trillion yuan), which will lead to long-term sluggish consumption after the asset bubble bursts. This may be more complicated than the situation encountered in Japan. It takes longer to resolve.
  my country’s economy has shown some signs, such as weakening business expectations and lack of confidence, leading to inactive overall investment; there is a great danger of asset bubbles bursting, and if the real estate market collapses, it will bring about a chain reaction and become the first sign of economic recession. fuse. Fortunately, since the bubble in my country’s stock market has been squeezed out, there will be no violent turmoil like that in Japan in 1990. If there is an economic recession, it may be a relatively mild economic recession, but due to sluggish consumption, it will be more difficult to get out of it in the short term.
two

  The above analysis shows that my country’s economy is facing the danger and possibility of entering recession. At present, there is still a valuable “window period” to eliminate various major hidden dangers. If handled properly, my country may avoid the serious situation like Japan. Nevertheless, governing a big country is like cooking a small fish, and one should be prepared for the worst. Now the economic circle urgently needs to deeply study such a question—how did Japan get out of the economic recession, and what will be done if a similar situation occurs in our country.
  Japan was able to finally walk out of the recession mainly because the following factors played a role. First, the government introduced fiscal stimulus policies and large-scale investment in infrastructure construction, which made up for the insufficient capital demand of enterprises and the insufficient market demand. After the bubble burst and entered recession, the economic scale was still not lower than the total scale before the bubble burst . According to Koo Chao-ming’s research, from 1990 to 2005, the Japanese government spent 315 trillion yen in deficit spending to prevent Japan’s economic aggregate from falling back to the level of 1985 , to keep the total economic output at the level of 1990, thereby avoiding a potential loss of 2 trillion yen in GDP. Second, during the economic recession, Japan’s sound micro-foundation has not been damaged. The two lines of production, sales and technological innovation of the enterprise are still intact and normal. The production and operation of the enterprise are still in good condition and can make a normal profit, so that the debt can be repaid with the profit. Research new technologies and develop new products. The third is that Japanese companies have maintained product competitiveness and can actively expand exports in the face of sluggish demand in the domestic market. They have maintained a huge trade surplus, which has effectively helped the Japanese economy gradually get out of recession. At the same time, during the economic recession, Japan has made large-scale overseas investment. In recent years, its annual overseas income has reached more than 3 trillion US dollars. In addition to its domestic GDP of about 5 trillion US dollars, it ranks far higher in terms of GNP (gross national product). in the international ranking by GDP.

  Compared with the situation in Japan, some aspects of my country’s economy are not conducive to coping with economic recession, or do not have the conditions of Japan at that time. First, Chinese companies are generally inferior to Japanese companies in independent innovation capability, market competitiveness and profitability. It is difficult for Japanese companies to continue to maintain normal production and operation and continue to make profits under the economic recession like Japanese companies. This has enabled my country to walk out of economic recession. China’s micro-foundation is not solid, and it lacks the resilience of Japan. The second is that the Chinese government is heavily indebted, and the fiscal deficit data seems to be acceptable, but the local government debt, especially the debt accumulated through various financing platforms, is huge. Once there is an economic recession like Japan’s in the 1990s, fiscal policy will need to play the leading role in anti-crisis, and the fiscal policy may be powerless. At the same time, unlike the situation in Japan at that time, the peak of my country’s infrastructure construction has passed, the effect of fiscal stimulus policies has become less and less obvious, and the efficiency of infrastructure investment has dropped significantly. It is no longer realistic to hope that the “infrastructure maniac” will save the economy. Third, the current international economic environment is deteriorating, and China’s foreign trade expansion has encountered serious obstacles. At the same time, because most of the products of Chinese companies are low-end products, which are substitutable in the international market, they have encountered serious challenges in countries such as Southeast Asia and India. Many orders and production capacity are being transferred to these countries at an accelerated rate. This makes it more difficult to make up for the lack of domestic market demand by expanding international market demand, making it more difficult for China’s economy to get out of recession.
  In order to deal with the possible adverse economic situation, strong measures should be taken resolutely and quickly to prevent problems before they happen. First, we should truly focus on enhancing the independent innovation capability and competitiveness of Chinese enterprises. Enterprise competitiveness is a problem at the microeconomic level, which cannot be solved by macro policies. It is necessary to deepen system reforms, stimulate innovation vitality of enterprises in technology and products, and improve enterprise competitiveness. The second is to face the new changes in the international economic environment, unswervingly expand opening up, maintain and increase the export of Chinese products, expand the international market share, and give full play to the role of foreign demand in stimulating my country’s economy. It is necessary to correct all practices of actively decoupling from the economies of developed countries, and take effective measures to manage and control conflicts with developed countries, so as to prevent the developed countries from being excluded from the economic globalization system and passively decoupling from the world economy. The third is to change the ups and downs of real estate control policies, adhere to the practice of gradually eliminating real estate bubbles, and avoid sudden real estate punctures, causing the collapse of the real estate industry and becoming the fuse of economic recession. The fourth is to learn from Japan’s practice in the 1970s and 1980s, truly put the foothold of economic growth on the basis of expanding consumption demand, and change the situation of over-reliance on investment demand. We must correctly handle the relationship between economic growth and improving people’s lives, and make up our minds to adjust the relationship between the primary distribution of national income and use more social wealth to improve people’s living standards. It is necessary to maintain concentration, so as to prevent the economic downturn from forgetting the original intention and returning to the fixed routine of investment stimulating the economy and crowding out residents’ consumption. To realize the transformation of economic development model, efforts must be made at both ends of supply and demand. On the demand side, a series of policies and measures to encourage and improve residents’ consumption should be adopted to boost domestic consumption; on the supply side, enterprises should be guided and encouraged to develop products with high production technology and reliable quality and promote services to meet the needs of residents’ consumption. Innovation enables residents to purchase satisfactory products and enjoy satisfactory services in the domestic market. Fifth, we must adhere to a scientific attitude and correctly handle the relationship between effective epidemic prevention and economic development.
three

  For some time, I’ve been thinking about two questions and forming some opinions. The research content of “The Great Recession” confirms my views on these two issues and makes my views clearer.
  First, has Japan really lost two decades? For a period of time since the implementation of reform and opening up, Japan has been a model for China to learn from in terms of technology and economy. For example, many advanced industrial production technologies and products were imported from Japan at that time. Chinese enterprises have introduced TQC (Total Quality Control) and Toyota’s enterprise management in an all-round way, which has become the beginning of modern enterprise management in my country. However, since my country’s total economic output surpassed that of Japan in 2012 and became the second largest country in the world, in the eyes of some people, Japan has become a second-rate country in terms of economy and technology, and China does not need to learn from Japan. Especially in the 15-year Great Recession in Japan in the 20th century, some people said that Japan lost 20 years, which was regarded as a symbol of Japan’s decline, and became an important talking point for some people to despise Japan’s neighbors. Has Japan really had a “lost two decades”? It is understandable that the news media and the general public cannot see the essence of the matter clearly. If people in the economic circle think the same way, it shows that they lack a comprehensive and in-depth understanding of Japan and are not professional enough.
  Most people only see that Japan has experienced a recession for fifteen or twenty years, but few people notice that Japan finally came out of recession, unlike some South American countries that have never recovered from it. At the same time, in the case of the Great Recession, Japan also managed to achieve the best possible outcome. For example, its gross national product has remained at the level of 1990, unlike the United States during the Great Crisis in the 1930s, when its GDP fell by about half. Unemployment on a large scale has ensured that the income and living standards of Japanese residents will not decline within 20 years.
  It took Japanese companies 15 years to repair their balance sheets, and it took a longer time to eliminate the negative impact brought about by the bursting of the asset bubble. Companies have become capable and willing to innovate technologies and products again. The macroeconomic relationship is becoming more and more reasonable. Japan At the cost of low growth, we have won a solid microeconomic foundation and a healthy economic pattern. As long as the price is worth it, it is not a loss.
  It took Japan more than 20 years to realize the transformation of its economic growth model, from mainly relying on investment to relying mainly on consumption. The “initial heart” of quality. The transformation of the economic growth model is very difficult. The difficulty lies in the fact that it is difficult for the government to have such determination, that is, it can still adhere to the consumption orientation when the economic growth fluctuates.
  A phenomenon overlooked by many people is that although Japan’s economic growth rate has not been eye-catching in the past two decades, it has achieved remarkable success in industrial structure upgrading and scientific and technological innovation. From 2001 to now, there have been more than 20 Nobel Prize winners in the field of natural science in Japan. Among the 12 technical fields that McKinsey & Company called in 2012 that will change human production and lifestyle, 90% of the fields Japan has achieved the third place in the world, while big data cloud computing, new materials, resource reuse, Japan has already achieved the world’s first level of scientific research in the fields of energy storage and robotics. Japan’s influence in traditional industries seems to be less than before, but this is the result of Japan’s voluntary abandonment of production and competition in traditional industries. For example, companies such as Toshiba and Hitachi sold TV and refrigerator production lines to Chinese companies such as Hisense and Haier. Turn to the main research and development and production of high-end products and components, and to the research and development and production of new materials. For example, the Huawei mobile phone that the Chinese people are proud of has a total of 1,361 parts, of which only 80 are made in China, accounting for 4.9%, and 869 parts are imported from Japan. Accounting for 53.2%, the value of imported Japanese parts and components in 2019 reached 53 billion yuan.
  Second, don’t blindly pursue extraordinary growth, and don’t be complacent about achieving short-term extraordinary growth. Economic growth is regular. There is only normal economic growth. There is no such thing as extraordinary growth. All rhetoric about “overtaking on a bend” is harmful. The speed of economic growth is mainly restricted by technological progress factors, market demand factors and resource supply factors. Trying to overcome the constraints of the above-mentioned factors and achieve the so-called unconventional growth will inevitably lead to production supply exceeding demand, resulting in excess production capacity and idle resources, resulting in waste of resources; Third, it is bound to be accompanied by a false rise in asset prices. At this time, a large part of the rapid growth of wealth is due to the rise in asset prices, a wealth bubble, and not entirely real economic growth. Therefore, unconventional growth is bound to be harmful, it will cost a lot, and it is uneconomical. On the one hand, this is because the supernormal growth does not conform to economic laws, and the high speed will eventually slow down, and the false prosperity will be brought back to its original form. The great prosperity will inevitably follow the Great Depression, which is not a gospel, but a nightmare; the second is supernormal growth. Once a huge wealth bubble is formed, the bubble will burst, and the people involved in the creation of the asset bubble will lose their money, disrupt the normal social and economic order, and lead to economic stagnation and long-term recession. This is what happened in Japan, and it is what China is trying to avoid.

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