Can China keep growing steadily in 10 years from now?

If you are interested in investments in stock markets, you may hear a lot of stories in China this year since it has been rising dramatically and its market capitalization hit 10 trillion USD for the first time. I am not an investment adviser for stocks. However, I am interested in sustainability of Chinese economy in the long run.  Because China is already the biggest economy in the world  in terms of GDP using purchasing power parity (PPP) according to the IMF.  It means that the growth of Chinese economy affects a lot of the other countries’ economies such as Asean countries.

One of the easy way to understand what is going on in China is to compare with Japan.  There is no need for complex economic theories here.  Just compare to find out what are similar and different between them.  I would like to compare Japanese economy in the 1970s, 1980s and the current situation in China.  First, I would like to compare the GDP per capita between Japan and China in order to understand the path of economic growth.

 

1.  China is similar to Japan in 1970s in terms of GDP per capita

In this article by the BBC, it is pointed out that GDP per capita of China based on PPP is 11,868USD.  This number is similar to the number of Japan in 1968 (11,292USD) according to FRED.

In the 1970s and 1980s, Japanese economy managed several crises such as oil crises and Yen appreciations. In these two decades, GDP per capita (PPP based) was getting more than two times bigger.  It means that China has opportunities to grow more in the long run if it can manage obstacles effectively in the future.

 

2. Data technologies play a key role to develop Chinese economy.

One of the biggest differences between Japan in 1980s and Current China is “Data technology”.   Cloud, Mobile devices, Internet, IOT and Big data are available in major countries all over the world now.  There was nothing like that in Japan 1980s. It means that every industry can be developed rapidly, effectively and with less impact to the environment if they can introduce data technologies effectively. China has already suffered from air pollutions in cities such as Beijing. So developments, with less impact against the environment are desperately needed to make economic growth sustainable.

 

3. Capitalism vs Communism

Another big difference is that Japan introduces capitalism and China introduces communism.  Yes, it is a big difference. But China learned and will learn a lot from capitalism and improve its social system. Especially China can learn Japanese failure since 1990, which is called “lost decades“.  As the result of that, entrepreneurs are more active  in China than Japan now. Alibaba, Tencent and Xiaomi are good examples of that while most of Japanese young guys want to work in traditional big companies, rather than create their startups. So I am sometimes confused which country has which system in reality.

 

No one knows exactly what happens in China in 10 years.  I would like to keep watching what is going on there. Are you an optimist or a pessimist of China?

 

Note: Toshi’s opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or solicitation to buy, sell or hold any security or to adopt any investment strategy.  The information in this article is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding any country, region market or investment.

Data from third party sources may have been used in the preparation of this material and I, Autor of the article  has not independently verified, validated such data. I accept no liability whatsoever for any loss arising from the use of this information and relies upon the comments, opinions and analyses in the material is at the sole discretion of the user. 

Can Abenomics achieve its objects after winning the election?

Liberal Democratic party (LDP) won the election in Japan yesterday. Then Abenomics is going to fight against financial markets.  Financial market is tougher than other political parties as it reacts very quickly. If LDP can not convince the financial market that financial condition of Japan can be improved,  interest rate of Japanese government bond (JGB) will increase rapidly and price of JGB will be plunged. It means collapse of Japanese fiscal condition as Japanese government might not repay interest rare of debts. This is the race against time.

Moody’s Investors Service downgraded the Government of Japan’s debt rating by one notch to A1 from Aa3 at 1st December 2014.  The outlook is stable. This is the beginning of the story.  From now on,  market participants will focus on how Abenomics work in Japan after LDP won the election.  Rise of consumption tax is postponed until April 2017.  So only less than two and half years are left for Japan. Can Abenomics turn deflation to inflation during such a short period?  Can productivity of Japan be improved strong enough to rise the consumption tax?

Debt to GDP ratio already exceeds 200%.  Japan has no experience of such heavy burden except the time after world war 2. Ray Dalio, founder of Bridgewater Associates, explains that we need policy mix below to solve the heavy burden of national debt .

1. Wealth redistribution

2. Spending cut

3. Debt restructuring

4. Debt Monetization

In short,  tax rate will be  increased to wealthy people,  Japanese capital expenditure and social welfare will be cut and Bank of Japan will finance JGB.   This plocy mix is needed to avoid JGB default. LDP should convince Japanese people that this policy mix is needed and should be exercised in a timely manner.  This is the toughest task for LDP.  But it can not be postponed because it allows financial market to trigger the interest hike.

Productivity may increase gradually by Abenomics however it can not offset hike of consumption tax rate.  At the digital era,  knowledge of software engineering,  machine learning and artificial intelligence are critically important.  These are key in order to optimize the systems,  streamline the processes and improve the productivity. Unfortunately management of Japanese big companies are not familiar with fields of software . So Japanese companies are generally shy and away the innovations to improve productivity by big change.  I do see a few managements whose majors are software engineering and compter science in Japan.  In my view,  it is too late to change this situations because it takes ten years to train new managements within companies.  But we cannot wait such a long period anymore.

Anyway,  we should listen carefully to what the financial  market says.  I am not sure whether LDP wins over the financial market or not. All I can say is that Japan should be changed by herself, rather than being forced to change  by the market.

How does economics work on a shrinking population in Japan?

Bank of Japan may cut its growth forecast for this fiscal year to see the result of GDP growth in Q2 after an increase of consumption tax in Japan, according to Bloomberg on 15 Aug 2014.   Is it too early to increase taxes? Or is it inevitable to decrease the fiscal deficit?  Let me consider a little bit here because this is very important not only for Japanese people, but also other aging societies which follow Japan.

 

Fundamental problem in Japan, I think, is shrinking populations. The population of Japan is decreasing at a rapid pace.  More than 200,000 populations are lost in Japan every year. It must be very sad that if we can see a 200,000-living city is disappearing from our sight every year.  Although it is almost impossible to see what happens in the population every day,  I am sure it is not good for economic growth, investment strategy. The richer countries are, the more population they can sustain in them.  Therefore, economics implicitly assume populations in countries are not decreasing at least unless there are disasters or epidemic. Unfortunately, it is not the case in Japan.  The population has been shrinking even though it is the third biggest economy in the world.

 

Aggregate demand

Shrinking population has a negative impact against aggregate demand as fewer people buy goods and services. Therefore tax increase may discourage consumer confidence more than in a normal economy in which populations are increasing. In addition to that older people consume fewer goods and services than younger people do.  There will be no need for new shopping malls, convenience stores, gasoline stands, schools and kindergartens anymore in such situations. Even thought we would need new hospitals to take care older people and funeral ceremony services when they pass away,  I do not think these services can compensate lost demands due to shrinking populations.

 

Export

How about exports to grow GDP?  When JPY is weakening, exports used to be picked up.  The current situation,  however, a little different.  Since the big earthquake hit Japan in March 2011,  trend of trade balance has been negative, even though JPY has been weakening.  One of the reasons is the importing energy to replace nuclear power plants.  Another is that Japanese consumer goods are less competitive than they were in 2000s.  So Japan cannot rely on exports to offset shrinking domestic demand.  What should we do? 

 

Human capital

One way to revive the Japanese economy is that bringing up high profit and productive industries.  The key is human capital in Japan to achieve that. When we focus on how older people should be cared after their retirement, however, people tend to forget how we should bring up younger people , who are the next generation of workforces. This is a kind of problem about optimization of our society.  How we should allocate our resources between older people and younger people.  Which should come first, schools or hospitals?  In terms of education in Japan,  I am not so confident to say that the Japanese education system enables its children to compete global competition to obtain skilled jobs. English, math and programming will be critical to raise employability in the future, however, it seems there is no change in the Japanese educational system to teach them effectively.  In the long run, I am afraid Japan can not raise productivity because its workforce lack fundamental skills.

 

Immigration

People who have never been to Japan, may not understand why Japan does not have immigrations from overseas to compensate shrinking populations.  In my view, Japan is not ready to have immigrations from overseas as it is culturally homogeneous.  People share the same language and the same experience.  It enables them to do “non-verbal communication” which is difficult to understand from the standpoint of foreign people. This is an obstacle to live with foreigners.  It takes longer time for Japan to accept immigrations as few people has experience of “living with foreigners”.

 

 

I must say there is no easy way out of this difficult situation.  Although tax increase from 8% to 10% is needed to decrease the fiscal deficit of Japan, it is very difficult to keep the best timing for the Japanese government to introduce it.  Japan has only limited time to make its fiscal balance to be sustainable.

Let us go surfing the sea of big data !

In the morning, I check my smart phone and i pad mini to see what happened during the night.  Every time I touch them, data is generated automatically.  How many devices such as smart phones and tablets are there in the world?  I am sure a lot of data is generated at this moment.

It is also noted that FRB, World Bank, IMF and other public institutions make their data available to public through their web sites. In addition, a lot of public data is getting easier to access thanks to the data gathering services. Data is the first key thing to consider when we start data analytics. Therefore, it is very important to know what kind of data is available at your disposal in analyzing data.

I have been using a data gathering service called “Quandl”. Quandl is a “data platform“, which enable us to collect numerical data published by hundreds of different sources, and host them on a single easy-to-use website.  Currently it can be used for free. Once I obtain the data, I visualize it in order to understand what it means and what the mechanism is  behind the data.  I use ” DataHero” to visualize the data I obtain.  It is easy to produce many kinds of charts and graphs. By “DataHero”, I can produce a lot of graphs by following its instructions, then choose the best one to present what I want to say.  It can be used for basic functionality without any fee. If you pay fees, you can get more functionality such as a tool to combine multiple datasets.  

 

According to the sun newspaper on May 20 2014, Mr Najib Abdul Razak, prime minister of Malaysia, said that the 6.2% of GDP growth in the first quarter of this year as extremely outstanding.  This is the highest among the list he presented in his Facebook site.  Let us see what is going on from the past to the present in terms of economic growth of Malaysia. I pick up the data of Real GDP growth rate,  Unemployment rate and Consumer price index (CPI) since 1990 in Malaysia by using  Quandl and visualize these data by using DataHero. It is very easy and takes less than 5 minutes if you are getting familiar with these systems.    Source : Open Data for Africa (IMF)

This graph tells us economic growth in Malaysia since 1990.  The growth rate is over 5%, except two economic crisis in 1998, 2009 and 2001.  The unemployment rate has been around 3%, which is good for the economy.  CPI is also around 3% and stable. I can say economic growth without inflation currently is achieved in Malaysia.

I would like to compare it to the situation in Japan since 1980.  Let us see the graph below.

GDP growth peaked out in the late of the 1980s, when the bubble economy was peaked.   Since 1990, when the bubble burst,  Japan has experienced the low economic growth.  CPI has been very low and sometimes went to negative as Japan has been in deflation.  The unemployment rate has been gradually increasing and  peaked over 5%. This period is called “the lost two decades” as Japan has poor economic performances. It is not easy to explain why it happened in Japan.  Some economists blamed monetary policy was not so effective enough to recover its economy.  Others criticized the fiscal stimulate was too late, too small and too short. I would like to analyze the mechanism of ” lost two decades” going forward in this blog.