China’s transition to a “new normal” period of slower growth naturally draws comparison to other countries’ historical economic development. Given its recent experience with rapid credit expansion, build-up in real estate, and stock market volatility, some observers wonder whether China faces a “lost decade” like the one Japan experienced following the collapse of its bubble economy in 1989-90. This comparison, while easy to make on the surface, is inappropriate. Invoking Japan’s past as China’s future merely contributes to a misunderstanding of the challenges China does face and a misremembering those Japan encountered a generation earlier.
The China of 2015 does have some fundamental similarities with Japan of the late 1980s. Like Japan before it, China’s rapid modern development relied largely on exports. Credit has grown dramatically, over 100 percentage points since the global financial crisis to over 250 percent of GDP. Asset prices, particularly in real estate, are up significantly over the past decade. Meanwhile, like Japan in the 1980s, China has begun to grow old, with its working age population shrinking after a long period of favorable demographics.
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