Japanification of China's economy has begun

Kim Dong-ho

The author is the editor of economic news at the JoongAng Ilbo.

Few would have imagined China could be worrying about deflation. Skeptics raised the possibility of a backlash from a rapid growth even before the 2008 Beijing Summer Olympics. They forewarned that the Chinese economy could be shaken from the bubbles of its rapid growth.

But the Chinese economy defied the doom-sayers. The economy instead gained impetus from the successful hosting of the Olympics and elbowed out Japan as the second-largest economy after the United States in terms of GDP. The news brought chagrin to the Japanese government and economic pundits, who held onto their faith that China would never be able to catch up with Japan. Then, some began to raise the possibility of the Chinese economy taking on the U.S. economy next, betting on China’s ascension to the top economy by 2030.

China has surprised the world again as its economy is fast losing steam on the lackluster consumption and export. The dramatic reversal of fortune of the world’s factory has been unsettling investors. The foreign direct investment in China hit its lowest in the second quarter since Beijing started collecting the data in 1998. Foreign investors are taking their money to India and Vietnam instead.

What matters is the ramifications of the slowdown on the Korean economy, as the Chinese economy started to show signs of running up to the entrenched stagnation of Japan. After the epic bursting of bubbles in real estate and stocks, the Japanese economy peaked out in 1990 and slumped into the decades-old stagnation. Japan is finally pulling out of the deflationary cycle, but whether the recovery is sustainable is uncertain.

The possibility of the “Japanification” of the Chinese economy stems largely from the extensive containment from Uncle Sam. The Japanese economy expanded at a menacing pace to threaten the United States in the 1980s. The book “The Japan That Can Say No” excited all the Japanese. But Washington stepped in to throw cold water on the euphoria by forcing Japan to appreciate its currency through the Plaza Accord and weaken its chip supremacy through a bilateral semiconductor agreement to check the rapid growth of the Japanese financial and industrial sectors. Thanks to the development, Korea could grab a chance to bolster its fledgling chip industry.

Since 2018, the United States has demonstrated a rare bipartisanship to rein in the dramatic rise of China. After Republican President Donald Trump built up tariff barriers against China, Democratic President Joe Biden followed up through the enactment of the Chips and Science Act and the Inflation Reduction Act to block China from accessing advanced technologies that can unlock new avenues of growth in its chip industry. The offensive has brought about a windfall for Japan. Its chipmaking ecosystem is being revived at the backing of the United States.

The implosive bubbles in the Chinese economy can accelerate its Japanification. The domestic conditions of China very much resemble that of Japan three decades ago. The outsized real estate market is stumbling. After the rescue of behemoth developer China Evergrande, another giant — China Garden — is teetering toward default. The Japanese economy was sucked up by a deflationary spiral after the crumble of the real estate market. When property prices fall, so do the value of assets held by companies and individuals. Constrained spending reduces corporate hiring and feeds a vicious cycle.

In China, the youth unemployment rate hit 21.3 percent, a number not easy to tame even for stimuli-ushering Beijing. The young unemployment rate may be fatal in pushing China to the dismal fate of Japan. During the deflationary streak, freeters — or freelancing part-time workers in Japan — numbered 4 million. The group typically representing the young had to survive on part-time work due to a lack of regular offers. China must fix the young persons’ jobless rate if it wants to avoid the same doom.

The weight of China-bound shipments fell to 19 percent in Korea. The trade balance also shifted to a deficit. In the meantime, the United States’ share in Korea’s exports has been expanding fast. Korea no longer can expect to ride on China’s growth. Korea must speed up its market diversification. Here, supremacy in product and service standards is key. In the exclusive tripartite summit at Camp David, the leaders of Korea, the United States and Japan agreed to deepen their cooperation on next-generation technologies. Korea must brace for the seismic shifts from the deepening Japanification of China’s economy.