Is China Headed for its Own “Lost Decade?”
As we recently announced, China has overtaken the United States as the top business travel market in the world. This was one of the main findings of the recently released GBTA BTI Outlook China 2016 H1 that was sponsored by Visa. While some would see China overtaking the U.S. as positive indicator for the overall Chinese economy, the report also warns that China’s economy will continue to slow compared to recent years. In fact, the recent China BTI asked if China was headed down the path of Japan’s “Lost Decade” of the 1990s.
Specifically, the report mentions that the underlying drivers of long- run economic growth in China are no longer able to support sustainable rates north of 10 percent. Growth of the Chinese economy is, however, in line with the Chinese central authority’s plan to provide the economy with a soft landing and is still expected to grow much faster than both developed nations and other emerging markets. One data point that analysts point to in the “Lost Decade” comparison is that the working-age population in China has already peaked and the slower expansion of China’s labor force will begin to decelerate growth. Japan’s peak and aging population, as a comparison, started to become a challenge in 1990 prior to its decade of recession. The United Nations estimates that China’s working-age population peaked in 2015.
Along with the working-age population peaking in China, investment spending has decelerated as well – partly due to China’s rebalancing plan and partly due to exterior market forces. Reduced capital is projected to lead to modest gains in labor productivity – another constraint on overall economic growth. Like the conditions in China today, Japan experienced anemic gains in investment spending beginning in the late 1980s and was one of the main drivers of the “Lost Decade.”
Similarly, Japan of the late 1980s and 1990s and China of today are propping up struggling firms and industries that were no longer competitive in the global marketplace.
However there are many more differences that there are similarities to Japan’s “Lost Decade” and the China of today. Differences between the two country’s economic outlooks suggest that China will be able to continue with at least moderate growth while Japan stagnated for over a decade – not least among them is the continued rise in business travel throughout China.
Other key differences between Japan of the 1990s and China of today is that China is currently growing at more than three times the rate of Japan during the 1990s. Additionally, China and Japan find themselves at very different stages of economic development. Japan was at a far more advanced stage in the 1980s and 1990s than China is today. China, therefore, has much greater latitude to adopt more advanced foreign technologies to help fill the productivity gap, an option a more advanced Japan did not have back then. Finally, while China’s work-age population may have peaked, there is still significant migration from the rural to the urban sections of the country that will help maintain gains in productivity.
On balance, while there may be some similarities between the Japan of its “Lost Decade” era and the China of today, the economic differences between the two will carry the day. China will likely continue to grow – though at a slower rate than in previous years – and will be able to weather changing economic conditions better than Japan did.