
Zombies once destroyed Japan's economy, now they're infecting China's - throwaway2048
http://qz.com/198458/zombies-once-destroyed-japans-economy-now-theyre-infecting-chinas/
======
nabla9
This is well written argument, but there is one big difference between China
now and Japan then.

China is still going through urbanization in unprecedented scale. About half
of the Chinese live in cities now. By 2030, cities will be home to 70 per cent
of China’s population and generate 75 per cent of its GDP. There will be 200
million Chinese moving into cities in next few decades. China can be close to
where Japan is now in the 2040 banking crisis. For now, even massive crisis
just delays the inevitable increase in demand that eats away all mistakes in
fiscal and monetary policy.

[http://insights.som.yale.edu/insights/what-should-we-
underst...](http://insights.som.yale.edu/insights/what-should-we-understand-
about-urbanization-china)

[http://www.cn.undp.org/content/china/en/home/presscenter/pre...](http://www.cn.undp.org/content/china/en/home/presscenter/pressreleases/2013/08/unprecedented-
pace-of-urbanization-presents-challenges-and-oppor/)

[http://www.cn.undp.org/content/china/en/home/presscenter/pre...](http://www.cn.undp.org/content/china/en/home/presscenter/pressreleases/2013/08/unprecedented-
pace-of-urbanization-presents-challenges-and-oppor/)

~~~
npalli
Yes, the urbanization argument for this time it's different. There is bound to
be massive urbanization in China. However what it ignores is the price of
housing the newly urbanized can afford. Eventually it will have to settle to
the economic value they add in the global marketplace. The price of housing at
many of these new ghost cities is already close to the level of heavily
developed western cities. So that leaves two possibilities

1\. Every newly urbanized Chinese person moving from the country side will
generate the economic potential of a Chicago or London person. So another 200
million investment bankers I suppose.

2\. The property values of these ghost cities will dramatically deflate to
measure up to the economic value added by the newly urbanized. Which means the
value of these massive properties needs to written down by the banks.

Most people making the urbanization argument assume that option 1 will
invariably occur. When in fact it is overwhelming likely that option 2 will
occur looking at the massive number of people being urbanized and the massive
deflationary pressure on every occupation. Urbanization per se will not cure
the ghost cities problem. You have to look at the prices too.

~~~
nabla9
There will be #2, but coming banking crisis will be temporary, not decades
long zombie slump like in already developed and urbanized Japan.

~~~
npalli
The situation in Japan developed because the real estate got disconnected from
its economic potential by a large margin. At the peak of the bubble in the
mid-80’s the land value of just the imperial palace in Tokyo was worth more
than the entire land value of California. A million times ratio!!. There is no
amount of urbanization that could have solved this problem for you because the
underlying economics did not make sense. In the end, I’m not sure the Japanese
had a choice, maybe they could have let some banks fail earlier but the size
of the bubble was so massive that immediate deflation would have triggered a
Lehmann like moment for them.

In fact, if Option 2 is correct I’m pretty sure the Chinese leadership has no
other option but to deflate the economic gap with a zombie like situation for
decades. If you think they will let a Lehmann-like moment to happen and
quickly reset prices back to the ‘right’ level you are mistaken. It would put
the financial system at risk; the entire legitimacy of the CCP in danger and
that would mean blood on the streets. They will keep shutting down the smaller
non-state banks and keep rolling the loans of the bigger state banks and
gradually write off the debt over several years. There is definitely no shock
therapy of short-term pain that makes sense.

~~~
justincormack
The land value of Beijing is now 60% of US GDP, the same ratio Tokyo was at at
its peak (its a somewhat odd measure, but hey).

------
camperman
This is a superb article but it's scary how many of the points made apply
directly to the US economy as well: zombie banks, real estate bubbles, a
declining currency, faith in the bureaucrats and so on.

~~~
pingburg
I think the underlying mechanism here is a centralized banking system in all
three countries. Without getting into the religious discussion of whether a
central bank is "right or "wrong", I would suggest that any system that relies
on a small group of unelected humans making decisions on the supply of the
underlying medium of exchange is imperfect and prone to favoring one group
over another for reasons that are not positive for everyone.

~~~
brc
In other words...we all agree that price fixing leads to either shortages or
surpluses..but we all agree that fixing the price of money in a central bank
is the right way to go. And we are not able to see the contradiction therein.

~~~
pingburg
In the end it's a question of alternative mechanisms. Either we use the
current system or we go with a "backed" medium of exchange. The "backed"
version suffers from elasticity (but that may or may not be a good thing). So
the issue becomes what are some other alternatives that aren't just derivative
of the first two?

------
hibikir
There is no need for a zombie China. Japan became a zombie due to terrible
monetary policy. Ben Bernanke wrote a big paper about it: Japanese Monetary
Policy: A case of self Induced Paralysis?

So even if China found itself in the exact same situation as Japan was that
day, we'd only see the equivalent of a lost decade if the Chinese monetary
policy was as backwards as that of the Japanese back then, and after that, and
the latest world financial crisis, I'd be shocked if China repeated the
behavior of yesteryear. This is especially true due to China's love of playing
with the country's exchange rate. The Chinese central bank would not bat an
eye if it had to devaluate the Renminbi forty percent.

So while the article describes the current situation very well, the
predictions aren't really necessary given the premises.

~~~
dageshi
Aren't they following the same path already? The massive dump in credit (cheap
money) into the Chinese Banking system after 2008 seems to be following the
same path that America/UK took after 2001. A recession causes the central bank
to ease and real estate/asset bubbles begin to blow up but external factors
(chinese export deflation in the 2000's, and weak global demand today) keep
inflation low.

The cheap money effectively subverts large parts of the economy because they
become dependent on it, but it only works while there are asset classes that
can continue to rise and can be easily traded into and out of e.g. real
estate.

Mr Bernanke as you quoted wrote a paper about this and yet in the end the
Central Bank alone in the US could not contain the fallout when the bubble
could blow no bigger. The US government had to absorb the losses by writing
cheques to bailout the institutions that were failing until they reached a
point where it was no longer politically feasible.

I don't see an easy solution to this, the issue is not just bad debt, it's
that there won't be an asset class to bid up anymore, there won't be a
practical way to get that easy credit into the system anymore.

------
westiseast
The common factor across most political systems is that political/economic
systems tend to carry on with the way they are going until they either
proactively reform or hit a wall (a crisis or crash). The article explains
well Japan's faults - without a definitive crash, politicians continued in
their support of poor economic policies for a long, long time.

A few commenters argue that China is different - it has different features,
but the above tendency will prevail here. Chinese politicians, businessmen and
economists are hugely invested in a system that is top heavy, vastly corrupt
and built around pillars of cheap labour, property/development and credit-
based investment. Politically speaking, they are also committed to a system
based around media control, repression, lack of debate and 'stability' (ie. no
change of the political status quo).

My personal fear - my house, family and business are all in China - is that in
the face of an economic crisis, we will also see a backwards slide into
repression as the party attempts to put an iron grip on the economy AND public
opinion.

My great hope is that China will see a few years of correction - letting the
people's income catch up with the bubbles, supported by a government that is
aware of the problems and motivated to act. Let's see...

------
jusben1369
I read the Quartz regularly and enjoy much of what they write. However, they
do appear to have an obsession with China and are nearly all doom and gloom.
Maybe that's because they're right and China is a house of cards about to fall
but I've found I have to take everything they write on China with a pinch of
salt as they write 1 or 2 articles per week on how screwed China is.

~~~
AJ007
Is Quartz biased against China or are other news organizations restricting
their reporting in order to ensure maximum access to the Chinese market?

[http://www.nytimes.com/2014/03/21/business/international/blo...](http://www.nytimes.com/2014/03/21/business/international/bloomberg-
should-have-rethought-articles-on-china-chairman-says.html)

------
tokenadult
First I read all the comments already posted here. Then I read the fine
article from beginning to end. This is a good article, and well worth a read.
I am old enough to remember the kind of reporting that was done about Japan in
the English-language press back when the book _Japan as Number One_ [1] had
just been published. Japan used to look unstoppable in the same way that China
looks world-beating to many people now. But Japan's "lost decade" of minimal
economic growth and declining soft power in the world has lasted a lot longer
than just one decade.

Japan in the 1980s already had significant advantages that China still lacks
in the 2010s. First of all, it had a political system with actual elections
that weren't wholly rigged. (The political system in Japan has opened up more
since then, but even thirty years ago it was well ahead of where China's
political system is now.) Second, Japan had a free press and unfettered access
to foreign reporters and foreign news media for decades by the 1980s. China
still doesn't have either of those information channels for correcting
problems in sufficient degree. Third, although primary education in China is
quite good in urban areas, good primary education in China is still not as
pervasive nationwide as it was in Japan by the 1980s. That's illustrated in
part by how few people in China (compared to Japan) are even conversant in the
national language. Barely more than half the population is conversant in
standard Mandarin Chinese.[2]

China is at risk. The "socialism with Chinese characteristics" (中国特色社会主义)
economic policy it officially now has cannot be sustained. It looks like it
has been growing rapidly in recent years for some of the same reasons that
Spain looked like it was growing rapidly a decade ago--a housing bubble. The
inevitable correction that has to happen in the investment markets in China
may not bring about a recession, but it can't help but bring about a change of
investment priorities that may make China look less amazing for a while. China
will really rise to world prominence when its common people enjoy free and
fair elections, a free press, and good educational opportunity all over the
country, something I hope they experience sooner rather than later. Meanwhile,
I'm actually more optimistic about India during my lifetime.

[1] [http://www.amazon.com/Japan-Number-One-Lessons-
America/dp/15...](http://www.amazon.com/Japan-Number-One-Lessons-
America/dp/1583484108)

[2] [http://www.bbc.com/news/world-asia-
china-23975037](http://www.bbc.com/news/world-asia-china-23975037)

[http://news.xinhuanet.com/english/2007-03/07/content_5812838...](http://news.xinhuanet.com/english/2007-03/07/content_5812838.htm)

~~~
nahname
> China will really rise to world prominence when its common people enjoy free
> and fair elections, a free press, and good educational opportunity all over
> the country...

Why?

~~~
w1ntermute
People were saying the same thing about the USSR half a century ago ("I have
seen the future..."), and we all know how that turned out. The simple fact is
that sustained growth is not possible under oppressive governments because
they don't permit creative destruction. Those who are in control will fight to
maintain the status quo once they can no longer create further growth in a
non-disruptive manner. We see this in America as well, as a result of
regulatory capture.

The role of government should be to provide for the less fortunate (but only
where they are in that situation for reasons out of their control) and to
create a level playing field for all entrants (whether that be workers
entering the labor market or companies entering industrial markets), no more.
Of course, the devil is in the details, since what sort of intervention is
required to create a level playing field varies wildly by industry/market, and
it gets constantly reshaped as technology advances. And of course, no one has
so far found a good solution to regulatory capture.

~~~
jessriedel
I think the natural distinction to make here is that the USSR had a poor
economic system, but that this is independent from whether their government is
autocratic or not. You can have a non Democratic government but still have a
high-growth economic policy, which the Chinese have arguably attained.

~~~
w1ntermute
My whole point is that the contemporary understanding that the USSR's economic
system was flawed was not apparent to Westerners half a century ago. This is
exactly the "I have seen the future" sentiment that I previously referred to.
Many Westerners, including Americans, were genuinely afraid that the USSR
would come to economically dominate, that they had developed a superior
system. The fact that so few people realize that these days is a testament to
the enduring success of the Western system.

In the 30s (yes, during the Great Depression), 40s, and 50s, the Soviets
achieved rapid economic growth, largely because they were starting from such
an economically backward situation (ring any bells when it comes to China?).
But when growth on the basis of "catching up" started to plateau, they could
make no further progress.

~~~
akiselev
> But when growth on the basis of "catching up" started to plateau, they could
> make no further progress.

That's a bold statement, the Soviet Union was far too big and non-homogenous a
construct to easily hand wave such generalizations. The post Soviet states are
(and were) rich in natural resources and before the exodus of the last 25 or
so years, had a very strong engineering and scientific base. You'll have to be
a lot more specific about when "cathing up" is supposed to plateu because
much, if not most of, the soviet republics had (and still have) a long way to
go to catch up with the western world.

I also don't see how it applies to China. Just like it was with the Soviet
Union, China's success or failure will depend on their leadership but they are
in a very different situation. The Soviet Union's entire political and social
structure was in upheaval in the 1980s and all sectors of government suffered
as a result, especially the ones in engineering, with wildly mismanaged civil
and technological projects. China, although I'll admit I have little
confidence in the accuracy of media analysis of the political situation there,
doesn't seem to have anywhere near the systemic instability that the USSR did
since it's population, although bigger, seems far more homogenous and united
under the state. Even though they aren't as resource rich relative to the size
of their population, they happen to be a major economic economic partner (
_supplier_ ) not only of many of its allies, but also its rivals (the US &
Europe).

~~~
w1ntermute
> You'll have to be a lot more specific about when "cathing up" is supposed to
> plateu because much, if not most of, the soviet republics had (and still
> have) a long way to go to catch up with the western world.

The plateauing process is gradual, so stagnation started long before they
finished catching up (not to mention the chaos of the post-Soviet era resulted
in a few steps backwards). When you've got an oppressive government that
justifies its legitimacy on the basis of growth, people are going to get antsy
from the slowdown long before you actually reach 1st world levels.

> I also don't see how it applies to China.

It applies to China because the authoritarian Chinese government results in
the politically powerful directly benefiting from the economic growth. Like I
said, innovation requires creative destruction, and this won't happen when the
political (and therefore economic) system is controlled by those who benefit
from maintaining the status quo.

This is not all that different from how the Japanese government and banks
(many of which were nationalized) propped up the "zombie" companies for years,
rather than investing that capital in newer firms.

> China, although I'll admit I have little confidence in the accuracy of media
> analysis of the political situation there, doesn't seem to have anywhere
> near the systemic instability that the USSR

Because China hasn't yet reached the state that the USSR was in in the 80s.
It's still growing, even if not at the same clip that it was a decade ago.

------
execonomist
I'm not too impressed by this argument. You could easily compare China with
South Korea or Taiwan and come to the opposite conclusion. This is why you
should never trust an argument that relies on two data points.

In fact, don't trust macroeconomists in general: individual preferences cannot
be aggregated, at least not with our present mathematical tools. As a result,
micro-founded macro models (99% of them) are complete nonsense: that's why
Caltech doesn't even bother teaching macro to its PhD students anymore. It
also explains why DSGE models have no predictive power whatsoever. Rant over.

~~~
lisptime
indeed

[http://econlog.econlib.org/archives/2008/03/junk_macroecono_...](http://econlog.econlib.org/archives/2008/03/junk_macroecono_1.html)

------
cilea
One important point not mentioned: Japan were alone when the country's economy
collapsed in late 80's. Today's China is surrounded with relatively strong
peripheral economies (Taiwan, Korea, etc.) The support is there. Also, do not
discount black-market economy. It's difficult to keep track of economic
progress in a cash-based economy. The strength of China's domestic economy is
often discounted by foreigners because of economic activities unaccounted for.
The real worry is the aging population and the lack of social welfare.

~~~
logicchains
While the lack of social welfare could be considered a problem from a moral
perspective, in terms of the national economy it's not a negative.

Compare for instance the situation where 50% of elderly Chinese starve after
they stop working, and the situation where 50% go on extensive state welfare.
In both situations the elderly aren't producing anything, but in the latter
they're consuming national resources and in the former they aren't, so from an
economic perspective the former would produce better results.

Of course this isn't a very humane way of looking at it, but the Chinese
leadership don't have a history of particularly humane behaviour.

------
aarkling
Even if it starts stagnating it will pass the US in total GDP. China has 10x
the population of Japan. Not that it matters. The average Chinese will still
be a lot poorer than the average American.

~~~
hga
However, thanks to the PRC's 1979 "one-child policy", they look to be the
first country to skip from the "industrializing" stage which generally has
reasonable population growth (weasel wording since Japan's fertility started
declining in _1974_ and has yet to stop), to the sort of modern social welfare
state we see in the West with too few producers trying to support too many
dependents. Except of course they don't have much of a welfare state.

It's sometimes called the 4-2-1 problem: 4 grandparents produced 2 parents who
produced 1 child. It's one of the reasons for their very high savings rates,
even with negative real returns. And like Japan, the retirees are in for
unpleasant times when they try to turn paper wealth into real consumption.

------
caio1982
That's a really nice piece, specially given the comparisons used in the
article. However, as a layman, I wonder whether 1) chinese socialism and 2)
its ownership of other major countries' debt make it all different or not. I
suppose it does. Their government seems able to do "magic" tricks with its
economy without pretty much any foreigner nosing around, and it also seems to
me that the chinese are everywhere. I don't recall japanese companies owning
so much of the world back in the 90's as the chinese do now with their
infrastructures projects in South America and Africa, the US's debt thing etc.
I think if they ever fail like the japanese did, they'd eventually drag a lot
of countries with them down the hole because of these global tentacles.

Except if the only part of this article worth analysing is its very end:
"[...] or permitting foreign banks to compete [in the chinese market]", then
it's case closed and it was just a piece of banking propaganda against China.

~~~
Amezarak
Japan is actually the second biggest foreign holder of US debt. As of February
2014, Japan held 1.210 trillion of US debt while China held 1.272 trillion.

[http://www.treasury.gov/ticdata/Publish/mfh.txt](http://www.treasury.gov/ticdata/Publish/mfh.txt)

I am having trouble finding historical data, but what I can find from the 90s
indicates that Japan alternated for the top foreign US debt holder with the
UK. I am not really sure what data to look for general Japanese foreign
investment.

------
Zigurd
These "We're #1 and they're going down" articles irk me. Look at the last
decade:

[http://snbchf.com/global-macro/gdp-growth-per-
capita/](http://snbchf.com/global-macro/gdp-growth-per-capita/)

As the proverb goes, we need to take the plank out of our own eye. Those
commies in Sweden are kicking our libertarian asses.

~~~
waterlesscloud
Of course, in terms of raw dollars US GDP annual _growth_ is the same or
higher than Sweden's _entire_ GDP.

~~~
Zigurd
Even the GDP per capita number is misleadingly optimistic if the 0.01% are
taking the lion's share of growth that I'll stipulate might be "the same or
higher than Sweden's _entire_ GDP."

If the typical American isn't prospering, what good is it?

~~~
tty
>If the typical American isn't prospering, what good is it?

Well, neither is the typical Swede. They have an astronomical housing bubble
that's just waiting to burst, the average household has a debt around twice
the income, while the gap between rich and poor has been widening for a long
time now.

It's not all roses and relative to where they are, most seem to be preparing
for worse days ahead, rather than better ones.

~~~
Zigurd
The reason I used Sweden as an example is that many Americans think commerce
in Sweden must be hobbled by taxes and regulation. It must surprise some
people that Sweden's GDP per capita has grown the most among Western
industrial nations, and much more than the US.

I'm not claiming the wealth gap in Sweden is healthy on an absolute scale, but
relative to the US it's about half. Every economy has challenges, but the
historical results I posted show that US chest-thumping is exceptionally
silly.

------
msandford
Yeah that's great. We're well on our way to a lost decade or two ourselves,
replete with zombie banks and corporations. This might as well be an
indictment of the decline of the US rather than the decline of China or Japan.

------
firstOrder
China's GDP has grown 7% or more every year since 1991. It had an impressive
economic record before that as well. You can read gloomy articles like this
going back to 1949. In that time, China has become the second largest economy
in the world. I was reading articles like this a decade ago, I was reading
articles like this two decades ago. People have been saying the sky is falling
since 1949. Despite all of that, China's GDP will probably grow 7% this year,
as well as 7% next year.

------
Al-Khwarizmi
This Quartz website, often linked in HN, is a usability nightmare. In my
Android phone's browser, I just cannot see any text at all, apparently I see a
sidebar full-screen. In my choice desktop browser (Opera 12), I do see the
article but for some reason it auto-scrolls up every few seconds, so I cannot
read it.

I can read it in Firefox but with noticeable UI latency when scrolling, as if
my computer was 3 or 4 years older than it is.

Seriously, these guys should fix their website...

~~~
T-hawk
Quartz does the same thing in Opera 12 for me. (Hooray, I'm not the last Opera
12 holdout on the planet.) Turning off Javascript for the site makes it
readable normally, though.

------
Gravityloss
A well written article, I liked that it avoided jargon.

~~~
hga
Indeed, although there's one bit of jargon I recently learned that I think is
really useful: financial repression
([https://en.wikipedia.org/wiki/Financial_repression](https://en.wikipedia.org/wiki/Financial_repression)).

Ask anyone in the US trying to live off interest income right now, like my 77
and 80 year old parents. Aren't that real interest rates in the US negative or
thereabouts, and I read that was true following the bust in Japan.

(Except of course in the US as of now our money isn't trapped in the country,
unlike Japan's back then for individuals and small business as mentioned in
the article, or China, who's currency wasn't even internationally traded until
a pilot scheme started in 2009, and is still, in the scheme of things, taking
baby steps.)

------
garfelnagel
It's funny, but the banks in the US are not being allowed to die either. Could
we be in the same boat?

------
jotm
Well, I can't comment on the macro economics, but on the small business side,
I can say that China will do much better than Japan. The Japanese are deadly
afraid of commitment and responsibility for some reason (the culture, likely),
which is not the case with the Chinese, who can bootstrap like crazy and are
less afraid of taking risks - although the latter might be because they have
nothing to lose. Plus, China's got 10x the population...

~~~
adventured
The Japanese are afraid of responsibility since what century exactly? I've
never heard of that. I've only heard the opposite in fact: that being
responsible is among the most important cultural things to the Japanese. You
see it in the history of how they view employment between employers and
workers for example. A general sense of making things right.

I think you'd be very hard pressed to find a people more responsible than the
Japanese.

~~~
ChrisGaudreau
Probably has something to do with their high national debt. Many people seem
to believe that high national debt reflects a population that chooses
government subsidies over employment. You see that with Greece and Spain a
lot.

~~~
jpatokal
Huh? Japan's employment rate remains extraordinarily high (3.6% unemployment,
after ~20 years of recession!), and Japan's government debt is almost entirely
to Japanese investors.

~~~
ChrisGaudreau
Indeed it is. Perhaps I wasn't articulate enough; I disagree with the notion
that the Japanese are "deadly afraid of commitment and responsibility."

------
phoebus
Why no one mentioned the big difference between china and japan? Japan is
actually a dependant state of usa. So usa can take advantage of japan whenever
it wants, consider the Plaza Accord when usa destroyed japan's economy. China,
whatever you name it, is a independent nation. It is not easy to order China
to do something, not like japan.

