China meet Japan, you have a lot in common

There was a long article in today's Globe and Mail on the slowing rate of growth in the Chinese economy. There are many in China and the west who are predicting the rise of China as the preeminent economic power sooner rather than later. I think they're wrong, because we've seen this movie before. It was called Godzilla takes Manhattan.

In the mid- to late '80's it was widely accepted that the Japanese economy was going to eclipse the US economy as the largest in the world. After all, the Japanese were the largest foreign holders of US debt. Japanese companies built everything from cars to electronics at a higher quality level and at competitive prices. Japanese companies were buying up US companies left right and center. We all knew what the future would bring and it would Japanese economic supremacy.

But then something happened. The Japanese economy went into the tank in the early 90's, in part a consequence of a bursting speculative bubble in real estate, followed by a banking crisis. The Japanese economy went into a funk and it never came out. It's debt to GDP ratio now sits at 200%, the highest in the developed world. Suddenly things that had been overlooked earlier came into focus. Japan had a rapidly aging population, a population that was shrinking. It lacked the dynamism and creativity of the US, and most importantly it had banks that were very closely tied to the ruling political party. One of the consequences of the Japanese banking crisis was that banks that were effectively broke, loans that were never going to be paid back, were never properly accounted for. 100's of billions of toxic debt was never accounted for, the government never forced illiquid banks under. Banks were afraid to loan to other banks (having no idea how much toxic shit they might be carrying on their balance sheets), banks were afraid to advance loans to businesses. The Japanese economy has not recovered.

Fast forward to China today. An economy characterized by ferocious growth, Chinese companies buying western companies, China is the largest foreign owner of US debt. Sounds familiar. And that's why we might want to reflect on the Japanese experience.

China has population problems (different from the Japanese problem but just as significant). They currently have about 30 million young men of marriageable age more than women of marriageable age. Underestimate the social dislocation produced by this imbalance at your peril. More importantly the Chinese banking system and it's close integration with the Chinese government make the Japanese look like models of probity in comparison.

This is from Mark MacKinnon's report in today's Globe and Mail: "The problem [shrinking economic growth] was unlikely to effect the wider Chinese economy, Prof. Chovanec said; the state has more than enough cash to prop up the official banking system by swallowing non-performing loans, essentially pretending they don't exist. "The magic of the Chinese financial system is it's all supported by untabulated, undisclosed, contingent liabilities. The government is the ultimate backstop for everything."

As the Japanese found out, and more recently the US, lack of transparency in banking creates nightmares for governments, but most importantly, nightmares for citizens. China meet Japan, you have a lot in common.