Reviews | Wonking Out: This Might Be China’s ‘Babaru’ Moment
OK, who ordered this? You would think that between Covid-19, climate change and American democracy under siege, we would already have enough crises on our plate. The last thing we need is a potential Chinese financial collapse. Yet here we are.
The story at the moment is Evergrande, a huge, heavily indebted real estate company that appears to be on the verge of failure. The echoes of the global financial crisis of 13 years ago are evident.
The conventional wisdom is that Evergrande is not another Lehman Brothers, that any fallout from its woes, and Chinese real estate woes more broadly, can be contained. But that, too, brings up some disturbing memories: Some of us are old enough to remember when all the really serious people insisted that the fallout from the US subprime debacle could also be contained.
Still, suppose conventional wisdom is right and Evergrande isn’t another Lehman moment. That still doesn’t mean things are going well. Because it seems quite possible to me, at least for me, that China is going through a “babaru” moment.
Wait what? Some of us still remember the Japanese economic bubble – or, as the Japanese themselves called it, the “babaru economy” – of the late 1980s, when the prices of many assets, especially the commercial real estate, have gone completely crazy. At one point, it was widely claimed that the land under the Imperial Palace was worth more than the entire state of California. Then everything crashed.
By the way, I am not making fun of the Japanese for using a term derived from English. English speakers – among whom everyone from political mandarins to business gurus find it obligatory to borrow foreign terminology – don’t have the right to feel schadenfreude when someone else borrows us. .
Either way, the bursting of the Japanese bubble did not lead to a financial collapse. But it was followed by a prolonged period of economic weakness. At first, many observers attributed this weakness to a hangover of previous financial excesses: Japanese companies had too much debt, they argued, or Japanese banks had too many nonperforming loans. But the weakness continued on and on, and in fact, in some ways, continues to this day.
I’m not saying that Japan’s real economy has been consistently depressed for three decades, which you might think if you only looked at real GDP The days when economic experts like (cough) Michael Crichton predicted Japanese dominance of the global economy are far behind us:
But you have to adjust those raw numbers for demographics. Thanks to low fertility and low immigration, Japan is a society in decline. The number of working-age adults has been declining quite rapidly since the 1990s. Real GDP per potential worker has actually performed well, essentially matching US performance:
However, Japan has only been able to maintain more or less full employment thanks to a constant economic stimulus: ultra-low interest rates and persistent budget deficits that have pushed the national debt above 200% of GDP. and the Japanese are no doubt deserving of praise for having handled a difficult economic situation with relatively little mass suffering.
But the point is, Japan’s economic situation has been tough. Why? Probably precisely because it is a nation in decline: negative population growth means there is little demand for new housing or new office buildings, for example. Japan has therefore become a country awash in savings with few places to go. Looking back, the 1980s bubble was not so much a source of future trouble as it was an unsustainable way to temporarily hide issues that would eventually manifest themselves no matter what.
And here’s the thing: While China is very different from Japan in many ways, China’s macroeconomic situation is strikingly similar to that of Japan when the Japanese bubble burst.
On the one hand, Chinese demographics appear remarkably Japanese. The working-age population peaked in 2015, and although the one-child policy that suppressed births is no longer in effect, this downward trend will not reverse, if at all, for many years. years.
On the other hand, China, like Japan in the bubble years, has a very unbalanced economy, with low consumer spending and extremely high investment:
Capital spending that exceeds 40% of GDP may make sense in a rapidly growing population economy – particularly in which millions of rural residents move to cities – which is also catching up with the most affluent countries. rich in its technological advances. But China no longer has that kind of demographics, and while it still lags behind the West (and Japan) in all of its technological prowess, productivity growth is slowing.
This means diminishing returns on investment; China needs to switch to a different model. (And Chinese officials know it.) But it continues to postpone that adjustment, increasing spending with huge amounts of credit – which inevitably leads to Evergrande-type debacles.
China could cover up this current episode, as it has done in the past. But sooner or later something has to give. Evergrande might not be the moment of truth, but it’s a sign that moment is coming. And what we don’t know is whether China has the kind of social cohesion that has allowed Japan to gracefully slow down without social and political crisis.
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