China’s Japanese Syndrome

Is China’s miracle economy catching the Japanese disease? The signs have been apparent for some time: a shrinking population, ageing demographics and stalling economic growth.  

Particularly worrisome for China’s authorities is the weakness of the manufacturing sector. The Purchasing Managers Index (PMI) for manufacturing sagged from 49.2 in April 2023 to 48.8 in May 2023, indicating weak factory output.  

China’s exports have long fuelled economic growth but they too are slowing in the face of recessionary demand in the West. Chinese export growth in May fell to 8.5 per cent from 14.8 per cent in April.  

China of course remains the world’s largest exporter and the second largest economy. But the expected bounce-back from the aborted draconian Covid lockdown has been muted. The real estate sector, which accounts directly for 25 per cent and indirectly, through ancillary industries, for 33 per cent of China’s economy, remains severely stressed.  

Public and private debt is soaring. Municipal corporations across China have recently resorted to publishing advertisements in newspapers asking debtors to pay up. Local bodies are short of funds for development projects because borrowers haven’t repaid loans or settled outstanding invoices.  

Economic growth in 2023-24 is estimated to fall below five per cent. The chip war launched by the United States-led West is aimed at keeping China at least one generation behind in advanced chip technology. Japan too has joined the West in denying China its latest chip technology. Ever-thinner chips are driving a tech ecosystem based on artificial intelligence (AI) and deep machine learning.  

A long-term worry for Beijing is the example of Japan’s 30-year decline from the world’s most dynamic economy to a society that fears it could cease to be a viable nation by the end of this century. Several characteristics of Japan’s decline are present in China.  

According to Bloomberg: “Japan will spend around ¥3.5 trillion ($25 billion) on policies meant to bolster its sliding birthrate. Prime Minister Fumio Kishida has warned that the country’s population crisis threatens to undermine its ability to function as a society.”  

There are significant similarities between Japan and China. Both are closed, ethnically homogenous societies. China is largely ethnic Han, Japan is largely ethnic Yamato. Both countries discourage immigration.   

In Japan that is a double-edged sword. The country has one of the world’s lowest levels of violent crime. But homogeneity – 97.5 per cent of Japan’s population is ethnic “Japanese” – brings with it the spectre of demographic Armageddon.  

The United Nations ranks Japan as the world’s “oldest nation”. More than 30 per cent of Japanese are above the age of 65. The average Japanese is 50 years old. The government fears a demographic tsunami will wash over Japan in the second half of this century. Several cities are losing population. Some towns and villages have disappeared entirely off the map as no one remains there.  

According to Mihoko Onoue, a realtor in Tokigawa, a small town not far from Tokyo, “Depopulation is an unstoppable phenomenon happening all across the nation. It’s neither good nor bad, but something we must accept. And once the baby-boomers are gone, we’ll see the population plummet further. So my job is to find people who are willing to relocate and live in Tokigawa for decades to come.  

“There are many unoccupied residences in Tokigawa that could be on the market, but most owners either underestimate their value or are reluctant to dispose of homes full of memories of their parents and ancestors.”   

China stares at a Japanese future: the average Chinese is 40 years old; over 15 per cent of Chinese are above the age of 65 and the ratio is rising.  

One reason President Xi Jinping imposed his draconian Covid lockdown policy last year, before abandoning it, is the fear that elderly Chinese would be vulnerable to new strains of Covid, leading to catastrophic fatalities, especially given the low rate of vaccination among elderly Chinese.  

The relatively mild Covid variant that struck China in 2022 allowed the authorities to end the lockdown and restart the economy. So far the results have been mixed.  

But China has many inherent strengths. Its demographic dividend began 30 years after Japan’s in the 1990s, and the ageing of the population will reach crisis proportions only in the 2040s. 

To prepare for a geometric rather than linear future economic slowdown, Beijing has begun a charm offensive. It recently hosted a raft of Western billionaires and CEOs, including Tesla CEO Elon Musk and JP Morgan Chase CEO Jamie Dimon.   

Musk was lavish in his praise of China’s advanced technology across sectors. Tesla manufactures 8,00,000 EV cars at its Shanghai Gigafactory. An upbeat Musk said at the end of his Shanghai visit: “I tell people throughout the world, the cars we produce here are not just the most efficient, but also of the highest quality.” 

Despite Musk’s optimism, Beijing knows it is dealing with three problems: one, a long-term demographic decline that will severely impact productivity and stall future economic growth; two, a tech war with the West on chips and other advanced technologies which could undercut China’s ambition to be the world’s technological superpower; and three, geopolitical tensions with the West and littoral Asian states over Taiwan. 

This cornucopia of demographic, technological and political challenges has forced Beijing to recalibrate its aggressive policy at the India border. China remains a predatory power but it knows it can’t fight all its enemies at once.  

The Financial Times noted that Dimon was more cautious than Musk about China: “Businesses with major ambitions in China are caught between tensions between Beijing and Washington. Dimon, in private comments, said the complexity of the international order now surpassed that seen during the Cold War.”