Chinese Economic Growth: Perspectives from the Japanese Manga

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Chinese Economic Growth Perspectives from the
Japanese Manga

• Robert Dekle
• FRB-NY and USC

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U.S. Optimism about China

• Authors such as Fishman (2005) and the popular
  business press in the U.S. are very optimistic
  about Chinese economic growth--eg. China will
  surpass Japan in aggregate GDP in a decade or so,
  and will surpass the U.S. in 50 years.

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Japanese Pessimism about China

• In Japan, the business and especially magazines
  read by some intellectuals such as Bungei Shunju,
  Shokun etc., are much more pessimistic about
  Chinese growth.
• This pessimistic attitude is reflected in the
  latest Manga Nihon Keizai.

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Japanese Manga

• Japanese Manga--or comic strip--cannot simply be
  dismissed as Kids Stuff.
• The Manga have served a useful pedagogical
  role--securities firms used them to teach people
  about stock investing political parties about
  policies.

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• The Manga Nihon Keizai or Manga Japanese Economy
  series fits into the role of the pedagogical
  comic strip.
• They are published about once a decade the first
  in the mid-1980s.

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• The first Manga Japanese Economy covers some key
  issues of the 1980s U.S.-Japan trade conflicts,
  Yen appreciation, government debt.
• The second Manga Japanese Economy, issued in the
  late 1990s covers banking sector distress,
  corruption of government officials.

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• The last Manga Nihon Keizai issued last year
  covered Japans Aging problem, the impact of
  emerging technologies such as virtual reality.
• Over 2/3 of the latest volume, however, deals
  with the emergence of the Chinese economy.

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Japans Recent Economic History from the
Perspective of Manga

• However, before we look at the Japanese
  perspective on recent Chinese economic growth,
  let us take a quick tour through some key moments
  in recent Japanese economic history, through the
  eyes of the Japanese manga.

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The mid-1980s U.S.-Japan Trade Conflict

• The following strip depicts Detroit automobile
  workers in the early 1980s, reacting to the surge
  of Japanese cars.
• As many of you know, U.S.-Japan trade conflict
  was a major political issue in both countries in
  the 1980s.

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U.S.-Japan Trade Conflict in the 1980s
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• As a response to this trade conflict, to quiet
  American critics, Japanese companies started to
  carry out foreign direct investment in the United
  States.
• This led to problems in Japanese subcontractors
  who supply to these companies those who followed
  their customers to the U.S. came out fine.

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Japanese FDI in the U.S. in the 1980s
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• Another result of the high U.S. trade deficits
  was the sharp appreciation of the yen vis-à-vis
  the dollar in the mid-1980s.
• This appreciation caused severe disruption in
  many Japanese heavy manufacturers, especially in
  steel and shipbuilding.

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Rise of the Yen and Japans Deindustrialization
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• To combat the deflationary effects of the yen
  appreciation, the Japanese government
  contemplated expansionary measures for the
  economy.
• To some Japanese, expansionary policies raise
  recurrent memories of Takahashi Korekiyo, who was
  assassinated by military officials.

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• In the early 1930s, Minister of Finance Takahashi
  embarked on expansionary fiscal policies to
  expand the economy.
• However, as he tried to tighten in the late
  1930s, he was assassinated by military officials,
  who needed ultra-loose fiscal policies for the
  military expansion in Asia.

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2-26 Incident the Assassination of Takahashi
Korekiyo by the Japanese Military
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• Thus, expansionary government policies are viewed
  with great suspicion by some Japanese, especially
  the Manga writer, Ishinomori Shotaro.
• In the following scene, the Manga depicts the
  Japanese monetary expansion of the mid-1980s as a
  result of a vast U.S.-Japan conspiracy.

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The Snowballing and Monetization of Debt
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Gaiatsu to Increase Domestic Demand
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The Cause of the late-80s Bubble Economy?
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• Some Japanese economists view the ultraloose
  monetary policy of the mid- to late-1980s as the
  cause of Japans asset market bubble in land and
  equity prices.
• This bubble collapsed in the early 1990s,
  leading to severe banking sector distress, and
  the lost decade and a half up until recently.

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The Collapse of the Financial System in the 1990s
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• The second Manga Japanese Economy was published
  in the late 1990s.
• It deals mostly with the 1990s banking sector
  problemsthe lax supervision of the Ministry of
  Finance of banks, the difficulty of banks in
  resolving real estate loans to the Yakuza.

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• Particularly interesting (to me) was the detail
  regarding the merger of two fictitious Japanese
  banks.
• It was obvious that the two fictitious banks
  referred to Bank of Tokyo and Mitsubishi Bank.

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• It tells how a special think tank or research
  institute had to be set up, to situate a former
  high ranking MOF official who was now CEO of the
  one of the merging banks.
• Of course, we know that the CEO was Tomoo Gyoten
  of Bank of Tokyo, who left the BOT-Mitsubishi to
  head up IIMA.

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• By 2004, Japan has shown tentative signs of
  emerging from its long recession.
• The third Manga Japanese economy published in
  2005 is forward-looking. It addresses three
  challenges that that Japanese economy must
  confront.

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• The first challenge is the aging population and
  the consequent sharp decline in the labor force.

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Population Aging A Major Problem
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• The young protagonist, a laid off former banker,
  who is now a consultant, is charged with
  revitalizing a dying Tokyo suburb.
• This suburb, a former so-called New Town like
  Machida, is aging rapidly.

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• This consultant is retained by the local
  government of the suburb to come up with a plan
  to help occupy the elderly.
• The consultant finds two things. That the
  Japanese elderly are quite healthy and able to
  work, and that many Japanese women want and need
  to work, so that someone needs to take care of
  children.

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• Thus, the consultant proposes to the suburb, the
  construction of a day care center staffed by
  the local elderly.

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• The Manga suggests that alleviating the Japanese
  demographic problem requires creative,
  entrepreneurial thinking.
• In fact, a theme of the latest Manga is that
  although there is now an economic recovery,
• Japan, as a mature economy, will never return
  to the heady days of rapid growth.

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• Innovative, risk-taking thinking is required for
  individual Japanese and the Japanese economy to
  survive.

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• The political leaning of the Manga Japanese
  Economy series is probably close to that of
  mainstream Japanese economists and businessmen.
• In fact, the first Manga Japanese Economy was
  published by the Nikkei, the Japanese Wall Street
  Journal.

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• There are alternative views, however, about the
  Japanese economys direction.
• A more leftist, but no less mainstream view, is
  quite suspicious of entrepreneurialism, and
• Japans movement towards a more, U.S.-style
  market-oriented or neo-liberal economy.

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• The following strip, taken from Sapio Magazine,
  argues that Horie, the entrepreneur who ran
  Livedoor and was arrested for accounting fraud,
  was a product of Japans structural reform and
  economic liberalization.

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An Anti-NeoliberalismUS Style Capitalism View
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Horie of Livedoor was Only a Successful
Practitioner of Japans Neo-liberal System
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Horie Did Not Break the Rules He was Only the
First to Practice this New Style of Capitalism
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Despite Hories Arrest
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There are Still Roppongi Hills Zoku Carrying
out Hories Ways Exacerbating Japanese Income
Inequality
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• Now back to Manga Japanese Economy.
• The second challenge is the effective use of
  innovative technologies.
• The Manga strip shows the protagonist trying out
  the latest in virtual reality technology.

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New Technology Virtual Reality
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• In this segment, the virtual reality system spins
  out a future scenario of crucial importance to
  Japan.
• That concerning Japans third and largest
  challengethe Chinese bubble economy.

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The Flow of Money Into China Can be Very Dangerous
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• As globalization spreads, corporations from
  around the worldespecially the Japanese--are
  rushing to invest in China.
• A major theme of the latest Manga is that this
  investment rush may be very dangerous to Japanese
  and international investors.

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Money Flowing Into China A Bubble?
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• Why? The Japanese popular (Manga and other books
  and magazines) argument.
• Real estate prices in Chinese cities are a
  bubble phenomenon.
• Shanghai apartments are 200 times the average
  wage of the Shanghai worker, and these prices
  increase at 20-30 percent per year.

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Very Expensive Real Estate in Shanghai
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China is not Japan in the 1980s China is at its
Peak!
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• There is also a massive non-performing loan
  problem in Japan, estimated to be about 50
  percent of Chinese GDP or more.
• Major banks in China are publicly owned, and
  loans are made on communist party membership or
  other non-economic criteria.

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• The collapse of the real estate bubble can lead
  to impaired bank balance sheets as in Japan.

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As Firms fail Problem Loans Worsen
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• The Manga advises that Japanese investors be very
  cautious in China. Why?
• The U.S. authorities will put pressure on the
  Chinese to let the yuan float, given Chinas
  trade surpluses reminiscent of Japans in the
  early 1980s.

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As with Japanese Exports in the 1980s Protests
in U.S.
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The More Things ChangeThe More they Remain the
Same U.S.-Japan Trade Conflict in the 1980s
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If the RMB floats like the Japanese Yen
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• The Manga says there will be a calamity when the
  yuan starts floating against the dollar.
• First, the yuan will appreciate, hurting Chinese
  exporters and the economy.
• The slowing economy will burst the real estate
  bubble and expose weaknesses in Chinese banking.

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• Perceived risks of investing in China will
  heighten, leading to a sudden stop of capital
  inflows, and a rapid outflow of domestic funds
  offshore.
• This funds outflow will put pressure on the yuan
  to collapse. A classic currency crisis, as it
  happened in 1990s Asia.

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• The 1 trillion in FX reserves will not help,
  since much of Chinese FX reserves are offset by
  foreign liabilities, in the form of foreign loans
  and investments in yuan.
• Foreigners will convert their yuan holdings into
  dollars and yen, quickly depleting Chinese
  reserves.

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FX Reserves in China, Mostly Short-term
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An Assessment

• Which is right, the optimistic U.S. view or the
  pessimistic Japanese view.

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• Japanese knowledgeable about China, but view
  colored by own recent past of U.S.-Japan
• trade relations, currency appreciation,
  excess liquidity (money), and asset market
  bubbles.

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• Although U.S. view too optimistic, probably no
  currency crash in China.
• Chinese asset (real estate) prices closer to
  fundamentals. 35 largest Chinese cities, land
  prices increasing at 10-11 percent per year.

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• China should be compared to Japan in the 1960s,
  when rapid economic growth and population inflows
  increases Japanese land prices in key cities such
  as Tokyo and Osaka by over 20 percent. Unlike
  1980s, such increases were sustainable.
• China is at its peak.

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• Chinese Foreign Reserves accumulation until
  end-2004, a large part were foreign portfolio
  inflows. (That is, about 600 billion dollars in
  end-2004).
• However, the 400 billion dollar accumulation
  since end-2004, Chinas large overall current
  account surpluses in the last two years.

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• Most Pessimistic view of Chinese NPLs (1
  trillion U.S. dollars). Chinese FX reserves can
  easily cover perhaps 50-80 percent or more of
  this outstanding NPLs.

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• Also, as China grows at 10 percent, and FX
  reserves accumulate, can grow out of NPL
  problem.
• But who knows. Better to be cautious, since China
  is now Japans largest trade and FDI partner.

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Very Preliminary Projections
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Chinese Technological Catch-Up with Japan and
other countries, Driving Growth
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Pace of Privatization Does not Matter
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Projections of Chinese Labor Productivity and GDP
Growth