China – Japanification scorecard: part 2
A follow-up to the video a couple of weeks ago. That looked at demand-side factors. This delves into the supply-side and factors behind the "deflationary mindset". In these areas, China today looks even more different from Japan in the 1990s.
For China watchers, Japanification is a hot issue. But it shouldn't be. A couple of weeks ago, I looked at demand-side issues. Here's an analysis of supply side and institutional factors, where the differences are even bigger.
- #8: currency strength. The JPY appreciated in the 1980s, and then rose by 65% before 1995, tightening financial conditions and contributing to deflation. In China, the CNY has been weakening.
- #9: offshoring. As domestic prices rose, Japanese lost competitiveness and global market share. But today, China’s market share continues to rise quickly.
- #10: import competition. In the 1980s, Japan was a relatively closed economy, and so vulnerable to a steady rise in cheaper imports. In China, by contrast, import penetration is falling.
- #11: Supply-side driven fall in prices. The fall in domestic prices resulting from JPY strength, offshoring and rising imports in Japan looked very different from the inflation elsewhere. China’s PPI deflation hasn't been dissimilar to US trends.
- #12: expensive versus cheap. Japan was expensive, even before the second round of JPY strength in the 1990s. That meant even more deflation was required to match price levels elsewhere. China today is cheap.
- #13: labour market regulation. Japan's heavily regulated labour market could be deregulated to cut costs. But with 300m unprotected migrant workers, important parts of China's labour market are already deregulated.
- #14: employment over wages. In Japan, there was a preference for maintaining staff numbers, meaning wages had to fall. This isn’t true in China's private sector, as seen with the big lay-offs in 2008 or 2022.
- #15: falling wages. Wages in Japan fell for long periods. The economy has been under pressure in China, but there is no evidence that overall wages are falling.
- Conclusion. Overall, China's similarity to Japan is only 30%. China has its challenges, but isn't destined for Japan-style malaise.
Chapters:
00:00 - Introduction
00:15 - China Today v Japan in the 1990s
00:54 - Recap of Demand Side Issues
01:22 - Introduction to Supply Side and Idiosyncratic Issues
01:43 - Scorecard #1: Currency Appreciation
04:10 - Scorecard #2: Offshoring and Global Market Share
05:44 - Scorecard #3: Import Competition
06:59 - Scorecard #4: Supply-Side Driven Fall in Prices
08:25 - Introduction to Idiosyncratic Cultural/Institutional Factors
08:46 - Scorecard #5: Expensive vs. Cheap Economies
10:26 - Scorecard #6: Labour Market Regulation
12:47 - Scorecard #7: Preference for Employment Over Wages
14:32 - Scorecard #8: Falling Wages and Deflationary Equilibrium
15:54 - Overall China Japanification Score (30% Similarity)
16:39 - China’s Economic Challenges vs. Japan’s Stagnation
17:23 - Market Implications and Interest Rates
17:34 - Closing Remarks