What Is America Doing To China? The Same Things It Did To Japan


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Washington has sent a clear and loud message to China in recent months: You can no longer take the American market for granted. You must develop your own market, so as to balance the trade books.

That’s why Washington has announced a host of tariffs on products imported from China.

This message isn’t new. It echoes a similar message America sent to Japan back on September 22, 1985, at the Plaza Accord.

That’s when the Japanese economy was growing by leaps and bounds by running a big trading surplus with the U.S.

We know what happened in the aftermath of the Plaza Accord. The Japanese economy went on a roller-coaster ride before descending into a prolonged stagnation that has lasted to this day.

Once a serious contender for world leadership, Japan is now counting lost decades.

Will China follow the same fate? It isn’t clear. China doesn’t share the same demographic problems that added to Japan’s economic growth woes. But it doesn’t share Japan’s innovation drive either, with which to overcome the “middle-income trap.”

China’s Key Metrics

GDP Annual Growth Rate 6.8%
Current Account to GDP 1.3%
Government Debt To GDP 44.3%
Government Budget to GDP -3.5%

That’s a development stage when a country cannot longer maintain high growth rates by copying foreign technologies and combining them with low-wage labor.

Still, there’s China’s domestic consumer market with a vast potential. But that potential will only remain so until China develops the institutions and policies that support a consumer economy. Like redirecting bank lending from the provincial and municipal owned sectors to the consumer sector.

That’s easier said than done, for a couple of reasons. One of them is that China’s banks by and large remain government-owned. This means that credit is allocated by political mandate rather than market forces. Bank loans end up going to State Owned Enterprise (SOEs), Town Village Enterprises (TVEs), and land developers to fulfill the agenda of labor unions and government bureaucrats.

Another reason is China’s underdeveloped welfare and healthcare systems, which forces households to maintain high savings rates.

Then there’s China’s debt, which officially stands at 48.5% — though where it stands unofficially is anyone’s guess. Official figures do not include the debt of the broader government sector, which includes banks, SOEs, TVEs, and pension funds.

While it’s unclear whether China will follow the fate of the Japanese, one thing is clear: China isn’t the same as Japan when it comes to yielding to foreign pressure. Even if that comes at a great cost. At least that’s what it has demonstrated during its long history.

Unlike Japan, China’s regimes confronted foreign traders before. And if they feel threatened, they will do the same this time around.

Are financial markets prepared to bear that?


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