Will China repeat Japan's 'lost decade?' 

By Xu Kangning (Global Times)

16:38, August 25, 2011

Edited and translated by People's Daily Online

In the context of economics, the "lost decade" refers to the Japanese economy's stagnation throughout the 1990s after rapid growth in the 1970s and 1980s. Technically speaking, Japan has experienced two "lost decades." Certain scholars and media outlets recently made bold predictions that China could face a Japanese-style lost decade. Prominent U.S. economist Nouriel Roubini, nicknamed Dr. Doom for his critical economic views, made a more specific prediction when he said that China's economy will suffer a hard landing in 2013. 

There are four main reasons why certain people think China will face a lost decade. First, China is facing a serious asset bubble, and its current regulation of real estate markets is like squeezing the bubble. Once the bubble completely bursts, the country's economy will slow down sharply and fall into complete stagnation. 

Second, China's economic growth has long been driven by exports. Due to the continuous appreciation of the yuan as well as the United States’ shift of focus to the real economy and import reductions after the global financial crisis, international demand is bound to fall, which will cause a sharp slowdown in China's economic growth. 

Third, China does not have a solid microeconomic foundation, and the financial performances of many Chinese companies are somewhat disappointing. Remarkable macroeconomic progress has covered the country's weak microeconomic foundation, which is bound to cause major problems. Fourth, China is facing growing social contradictions. Extremely unbalanced development and increasing conflict of social interests have caused many non-economic issues, making it difficult for China to continue to focus on economic growth. 

These arguments seem academically plausible, but the scholars and media outlets have in fact exaggerated the negative effects of existing problems on China's economic growth. Due to lack of understanding of the country's specific conditions, they have linked China's economic development to a Japanese-style lost decade in a far-fetched manner. 

China indeed faces the asset bubble issue, yet the issue is not serious enough to lead to a "lost decade." Two decades ago, Japan's asset speculation went so far that Tokyo's housing market value was as much as that of the entire United States, which squeezed the investments in the real economy and ultimately led to the catastrophic consequences for the economy. Furthermore, in addition to the impact of the asset bubbles on Japan's entering into a "lost decade," the United States forced yen to drastically appreciate through the Plaza Accord, undermining the competitiveness of Japan’s manufacturing industry, where Japan's competitive edge mainly lied. 

As one of the "three major driving forces" behind economic growth, exports have made great contributions to China's economy. However, the contributions have been "misinterpreted." Around half of China's export trade is processing trade. This means that China must import a large amount of raw materials and semi-finished products before exporting finished goods, with the added value left in china accounting for only a very small portion of the export value. 

For instance, an Apple iPad is priced around 600 U.S. dollars and is first assembled in China with core components imported from the United States, Japan or South Korea and then is exported, leaving only about 11 U.S. dollars of added value in China. Research shows that China's net export contributes only 2 percentage points to its economic growth, compared to China's 10 percent of economic growth rate. Furthermore, although the United States or other countries will develop their real economies in the future, the global trade value will maintain its upward trend. Despite difficulties, China's exports will keep rising but at a slower growth rate. 

It is a fact that China's enterprises have weaker innovative abilities and lower productive efficiencies compared to the powerful international enterprises. However, this issue existed in the past, and it currently has not worsened. In fact, the efficiency of China's enterprises is ceaselessly improving, though the speed of progress is relatively slow. We admit that China's microeconomic foundation is not ideal enough, and China's innovative ability is relatively low, but it does not mean that China’s economy will step into a lost decade. Regarding the social contradictions and economic development gaps, China is trying hard to solve such issues during its development, and only if China maintains a relatively rapid economic growth, can it solve these issues gradually. 

Western countries' attitudes towards China are always contradictory. On the one hand, they are willing to see an economically prosperous China creating a larger market for the world. On the other hand, they are not willing to accept a powerful country the strength of which is approaching or even surpassing their own. Therefore, advocating China's decline will be a long-term theme in the West, especially in the current period of ever-changing political situations and turbulent economies. 

We do not accept the viewpoint that China is stepping into a lost decade, but we must never evade or cover the economic issues facing China. In fact, China's current economy has many issues that foreigners have not seen or have not deeply seen. For example, the overall development is too extensive and simple, the development speed is emphasized too much, and the government credit has been severely weakened by government debt. The key is that we must be practical and realistic, face the realities directly and have confidence because these are absolutely necessary attitudes for China's long-term prosperity. 

(The author is the president of the School of Economics and Management under the Southeast University)

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