Sample Business Studies Essay Paper on Chinese Versus Japanese Economy

Chinese versus Japanese Economy

China’s economy is one of the world’s largest economies when measured with the purchasing power parity (PPP). In fact, there are arguments that PPP is one of the main factors behind China’s big economic growth surpassing countries such as the United States.[1] However, this growth did not take place overnight because by the 17th Century, China had already demonstrated a great potential for its economic growth. The country began its economic catch-up in 1978 after the implementation of reforms. The changes have seen China lift over 800 million Chinese people out of poverty resulting in a ballooning middle class. However, the point of interest is how China managed the feat. Foremost, China adopted labor-intensive methods of production and became the world’s manufacturers, which led to an increase in the exportation of cheap goods to the world. In 2016, however, China experienced a GDP growth of 6.7% from the previous year’s 6.9%. The decline is attributed to the waning manufacturing and construction output which are the primary drivers of economic growth.[2] It was also attributed to the decline in the labor force with slightly over 12 million jobs created between 2012 and 2016.[3] Additionally, China’s total debt has increased to 237% of its GDP making it difficult to sustain the high investment. On the other hand, Japan, which is a major exporter of automobiles and electronics and importer of oil in the world, is the third largest world’s economy having been overtaken by China in 2010.[4] In the 1980’s, it experienced an economic bubble due to rising stock and real exchange prices.[5]  However, the situation was salvaged when the Tokyo Stock Exchange collapsed in 1992 leading to a hike in the real estate business. Japan has experienced an almost constant growth of 1.5% which is quite low for a developed country. While deflation continues to be a challenge for Japan’s economy, the Bank of Japan has enhanced its monetary policy making it more flexible and sustainable.[6] China is likely to follow the growth-bubble-burst inflation, experienced by Japan.

China has experienced a rapid economic growth over the decades to become one of the superpower nations. Virtually, everything in contemporary China has changed fast and quickly that it is like ancient and contemporary China are two different places.[7] However, it may follow in the footsteps of Japan because of several reasons. To begin with, China is still a developing country because as at 2010, the world-bank estimated that 360 million people in China lived on less than $3.10 a day which is too little for such a huge number of people. Additionally, regional disparities in China are a harsh reality, and therefore, the economy of China on its own cannot be sustained by the locals only. However, China continues to export its electronics, machinery and even garments to other countries, which brings attention to the question of where China sources the money to support its economy and ensure a continuous production. China is on a borrowing spree, which is worrisome because its national debt has risen to 250% of the GDP making hard sustained investment pretty hard. The country is likely to move from a growth stage to a bubble considering excessive loans triggered Japan’s economic bubble in the 80’s.[8]. The country managed to gain a competitive advantage over the Western nations as it could manufacture almost similar goods but sell them at lower prices. The Bank took increasing risks as it borrowed funds which were then invested in numerous buyouts in the U.S. China is currently showing the same confidence. It has even surpassed Japan to become the second-best economy in the world, yet its national debt continues to rise. Currently, China provides 40% of its annual growth and supplies 20% of the U.S imports which was the same percentage in the mid 80’s when Japan’s economy crashed.[9]

The other proof that a bubble is looming in China is the extent of similarities between the two countries more so in the production line and the decisions that led to the crisis in Japan in the 80’s with critics attributing Japan’s crisis to restructuring of institutions contrary to institutionalist expectations.[10] Foremost, industrialization in both China and Japan majorly came about due to the manufacturing and assembling of machine parts and electronics. Additionally, in the mid 80’s, Japan was an economic bubble while stocks and real estate suffered inflation at the same time.[11] People became wealthy homeowners, and the cost of living in the city skyrocketed. Similarly, Presently in China, the middle class have become very wealthy. The cost of an apartment in Beijing city is 50 times the average annual income of the residents. Surprisingly, the city is flooded despite the high cost of living, which points to the fact that China has so much liquid money in its economy. Moreover, the socio, political and financial euphoria experienced in the 80’s by the Japanese is currently being experienced in China. The Chinese, presently, have a financial freedom and are touring the world like never before. For instance, in 2016 alone, 122 million tourists from China toured the world while in 1989; 9.66 million tourists from Japan explored the world. China’s economy is also experiencing gradual integration into the global economy, what is attributed to the country’s systemic change towards the market system and the focus on export-led growth.[12]

China’s trade surplus created a conflict during the 2008 Global Financial Crisis. The country’s surplus had peaked to $350 billion which meant that China’s exports were minimizing the market for other countries. As a result, China was partly blamed for the crisis, and this points to the fact that its local economy on its own cannot result in a favorable GDP as the country’s wealth is not evenly spread out. Therefore, China was maximizing its returns by supplying surplus goods to the world. Hence the trade imbalance resulted in a peak in global unemployment rates. Similarly, Japan received a backlash in the 80’s when its surplus peaked to $83 billion. Shortly after that, Japan’s economy burst.

It is quite evident that China is experiencing an economic bubble. However, the problem is that bubbles create an optimism that breaks all limits. Investors want to participate ignoring the risk of the bubble bursting soon. If the bubble bursts, it may result in serious global implications. The main problem is that China’s economy did not grow gradually like that of USA but instead suddenly peaked due to increased exports. As a result, the country neglected the domestic demand that has its fair share of importance. Statistics show that China’s GDP growth rate has continuously declined from 2012 to 2016. In 2012, the country’s GDP was 7.9%, it then decreased to 7.8%, 7.3%, 6.9%, and by 2016 it had reduced to 6.7%. The consistent decrease is a sure indicator that an economic problem is looming.[13] The economic slowdown in China is quite noticeable because some sectors like mining and manufacturing are already showing signs of collapsing.[14] Additionally, factories are struggling while many that are owned by the state are manufacturing goods that no one is buying, which can largely be blamed on the fact that China has neglected the domestic market.

The other reason that confirms that an economic bubble burst is approaching is that China adopted the same policy that Japan used in the 1980’s to generate rapid development. Therefore, the country is repeating the same mistakes Japan made in the 80s. China has recently enjoyed a remarkable economic growth phase; unfortunately, the same policies are now likely to drive it into deflation or even economic stagnation. Furthermore, the worst scenario may happen in China because of its poor infrastructural development and a vast population of poor people. Wasteful investments are being undertaken by many people who eventually are going to send the country to its knees. The country is nurturing targeted industries and promoting exports in a bid to generate rapid growth. The result is excessive cement factories and steel plants that are keeping growth engines spinning. Additionally, property prices are rising rapidly such that there has been an intervention to control them. Soon the Bank of China may have to intervene by tightening the lending policies as it happened in Japan, and this decision may plunge China into an economic bubble burst and an ultimate economic limbo. Economic bursts usually occur when a country has too much money in the economy due to lenient lending rates and poor spending habits. At the time that Japan was falling into an economic bubble burst, the country had lending rates of almost zero percent.[15] A burst of China’s economic bubble will send a massive deflation shock to the entire world, and therefore, the reason an immediate check should be placed.

Japan is still grappling with an economic deflation several decades later. Even after recovering from the economic burst and implementing the yield control curve, Japan has only succeeded to control volatility in yields. Currently, the leverage in China is worse than Japan in the 1980’s. Hence, China needs to set on a path to financial recovery before it triggers a Global Crisis. An example of how worse the situation can be is that in 2016 while China’s economy was booming on borrowed money, the commodity prices all over the world was rising. Credit conditions have started tightening in China, and the result is a decrease in the prices of ore. Should China reduce the demand for crude oil, then the result will be a decline in oil prices. These few examples show how much influence China’s economy and purchasing power has the whole world. Consequently, the Chinese government should embark on a journey of reducing bank lending. Practical measures should be put in place. The longer China delays dealing with its excessive lending, the worse the scale of the problem will be.

Some economists are, however, not convinced that China is headed to an economic growth-bubble-burst-deflation. There have been arguments that Japan’s downfall happened when the country got into the Plaza Accord agreement in New York that would see the dollar depreciate. The risk was too great for the country that had just recently been an economic superpower to handle. The Japanese Yen indeed strengthened against the dollar three years later. However, China has always avoided risks that are too critical. For instance, its reluctance to take risks was seen in 2015 when the country salvaged the situation to rescue the stock market. Second, some economists argue that China has already overcome most of the pitfalls that led to the collapse of the Japanese economy in the 1980’s. Andy Rothman, an investment analyst, argues that many differences exist between Japan in 1980 and China presently. Additionally, some have argued that the mistakes Japan made in the 80’s were grave and they have served as lessons for China and other countries; hence China will not meet Japan’s fate. Moreover, it has been argued that China has sufficient engines that it can use to rebound from the great crash unlike Japan thus the move to a consumption-driven model from an export-driven model.[16] From a personal viewpoint, these opinions may be unacceptable because the first mistake China made was adopting the same policies that had led to the collapse of the Japanese economy. Hence, it is inevitable that it will face the challenges faced by Japan since it has implemented  the erroneous policies of Japan.

To sum up, an economy is held together by its policies and financial decisions. Continued lending by banks in China is going to send the country and the world into an economic crisis. The country is reading from the script that brought down Japan’s economy 30 years ago. The government is experiencing faster debt-growth and rapid asset appreciation. The increased prices in Beijing are a great pointer. The biggest problem is that the government has refused to acknowledge that an economic crisis is at hand. In essence, its leaders are content and is the reason why at the recent World Economic Forum, the Chinese premier told leaders that the reforms were working for them. China also has anti-monopoly laws that have hindered government protection of businesses. It is quite possible that an economic crisis is about to hit China and the world unless immediate measures are implemented.

Bibliography

Baig, Mr Taimur. Understanding the costs of deflation in the Japanese context. No. 3-215. International Monetary Fund, 2003.

Breslin, Shaun. How China Changed the Global Economy and the Global Economy Changed China: Thirty Years of Investment and Trade. unpublished working paper, University of Warwick, 2008. Retrieved from https://www2.warwick.ac.uk/fac/soc/pais/people/breslin/research/30years.pdf

Hamada, Kōichi, Anil K. Kashyap, and David E. Weinstein, eds. Japan’s bubble, deflation, and long-term stagnation. MIT Press, 2011.

Kwon, Hyeong-ki. “Japanese Employment Relations in Transition.” Economic and Industrial Democracy 25, no. 3 (2004): 325-345. Retrieved from https://pdfs.semanticscholar.org/fff6/8912689c823a974fc8296b9ac65a720a2b8f.pdf

Lin, Justin Yifu. “China’s economic development and cultural renaissance in the multipolar growth world of the twenty-first century.” China Economic Journal 6, no. 1 (2013): 1-11. Retrieved from http://siteresources.worldbank.org/DEC/Resources/84797-1104785060319/598886-1104852366603/599473-1223731755312/Lin-China_Economic_Development_and_Cultural_Renaissance_in_the_Multipolar_Growth_World-Beijing_Forum.pdf

Lin, Justin Yifu. Lessons of China’s transition from a planned economy to a market economy. Leon Koźmiński Academy of Entrepreneurship and Management, 2004. Retrieved from http://www.tiger.edu.pl/publikacje/dist/lin.pdf

Lin, Justin Yifu. New Paradigm for Interpreting the Chinese Economy: Theories, Challenges, and Opportunities. Vol. 7. World Scientific, 2014.

Scissors, Derek. “The United States vs. China—Which Economy Is Bigger, Which Is Better.” Backgrounder 2547 (2011): 1-10. Retrieved from http://thf_media.s3.amazonaws.com/2011/pdf/bg2547.pdf

Wang, Gungwu, and Yongnian Zheng. China: Development and Governance., (2013). Retrieved from https://books.google.co.ke/books?id=phrigTnIuN8C&pg=PA106&lpg=PA106&dq=Do+you+think+China%E2%80%99s+economy+will+follow+the+pattern+of+Japan%E2%80%99s+economy+in+the+future&source=bl&ots=SbAxtRqovs&sig=Hhzeu2GqqEiY3pule_JGWS3uHZU&hl=en&sa=X&redir_esc=y#v=onepage&q=Do%20you%20think%20China%E2%80%99s%20economy%20will%20follow%20the%20pattern%20of%20Japan%E2%80%99s%20economy%20in%20the%20future&f=false

Wilson, Dominic, and Roopa Purushothaman. Dreaming with BRICs: The path to 2050. Vol. 99. New York, NY: Goldman, Sachs & Company, 2003. Retrieved from http://www.goldmansachs.com/our-thinking/archive/archive-pdfs/brics-dream.pdf


[1] Scissors, Derek. “The United States vs. China—Which Economy Is Bigger, Which Is Better.” Backgrounder 2547 (2011): 1-10.

[2] Baig, Mr. Taimur. Understanding the costs of deflation in the Japanese context. No. 3-215. International Monetary Fund, 2003.

[3] Wang, Gungwu, and Yongnian Zheng. China: Development and Governance., (2013).

[4] Wilson, Dominic, and Roopa Purushothaman. Dreaming with BRICs: The path to 2050. Vol. 99. New York, NY: Goldman, Sachs & Company, 2003.

[5] Baig, Mr. Taimur 26

[6] Baig, Mr. Taimur. 27

[7] Breslin, Shaun. How China Changed the Global Economy and the Global Economy Changed China: Thirty Years of Investment and Trade. unpublished working paper, University of Warwick, 2008.

[8] Lin, Justin Yifu. New Paradigm for Interpreting the Chinese Economy: Theories, Challenges, and Opportunities. Vol. 7. World Scientific, 2014.

[9] Lin, Justin Yifu 17

[10] Kwon, Hyeong-ki. “Japanese Employment Relations in Transition.” Economic and Industrial Democracy 25, no. 3 (2004): 325-345.

[11] Baig, Mr. Taimur 23

[12] Lin, Justin Yifu. Lessons of China’s transition from a planned economy to a market economy. Leon Koźmiński Academy of Entrepreneurship and Management, 2004.

[13] Lin, Justin Yifu 32

[14] Lin, Justin Yifu. “China’s economic development and cultural renaissance in the multipolar growth world of the twenty-first century.” China Economic Journal 6, no. 1 (2013): 1-11.

[15] Hamada, Kōichi, Anil K. Kashyap, and David E. Weinstein, eds. Japan’s bubble, deflation, and long-term stagnation. MIT Press, 2011.

[16] Lin, Justin Yifu 43