China Now = Japan of 1980s

NYTimes writes about the economic challenge that China poses:

The welcome that China is offering to multinational companies and foreign investment has left many Western business executives, so critical of a closed Japan more than a decade ago, enthusiastically embracing China, its cheap work force and its huge markets.

But that same openness combined with China’s vast population of 1.3 billion and military muscle makes it an even greater long-term economic challenge to the United States than Japan seemed to be in the 1980’s, according to a growing number of executives, economists and officials.

While China’s economy is still one-third the size of Japan’s, the potential size of its market has made it very hard for companies to say no when Beijing officials demand that they build factories, transfer the latest technology or adopt Chinese technical standards.

Japan has effectively run out of low-wage workers for its industries, and quickly brought much of its economy up to and in some cases beyond Western technological standards. China still has vast reserves of cheap labor in inland areas and many backward industries that can grow swiftly as they copy Western and Japanese methods.

“China could do what Japan did, as a very fast follower, but China could do it bigger and better and for a longer period of time,” said Steven Weber, an Asia scholar at the University of California at Berkeley. “It’s not necessarily as vulnerable as Japan was.”

But while Japan’s danger to other economies over the last decade has taken the numbing forms of economic stagnation and political lassitude, China poses the risk of fast, sharp shocks.

Its transition from a planned economy to a form of capitalism seems to make it especially susceptible to economic booms and busts, and Chinese officials have begun worrying that an unsustainable economic bubble is developing. At the same time, China’s one-party system may struggle to adapt to the social tensions brought to the surface by rapid economic development.

Optimists see it surmounting such obstacles. “Once China passes the high growth, it will have the bursting of the bubble,” said Eisuke Sakakibara, Japan’s former vice minister of finance for international affairs, “but that will happen in 20 years. China is Japan of the 1960’s.”

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Rajesh Jain

An Entrepreneur based in Mumbai, India.