US-China Relations Updates

Lin Yifu, Dean of the Institute of New Structural Economics at Peking University, a member of the National Committee of the Chinese People’s Political Consultative Conference (CPPCC) and Deputy Director of the Economic Committee, gave a speech at City University of Hong Kong titled “Is Japan’s 30-Year Economic Decline Due to Deliberate Suppression by the United States? Why Can China’s Economy Continue to Grow Without Following in Japan’s Footsteps?” on November 6, 2023.

Recently, there is a very famous Japanese economist named Gu Chao Ming（Richard Koo）. He said the reason why Japan’s economic development has been very slow from the 1990s until now is not only due to the decline of the so-called balance sheets but also because China, like Japan in the 1990s, is experiencing the decline of the balance sheets. He said, “Why has there been 30 years of economic decline? It is because of the real estate bubble. Many companies have invested a large amount of funds in real estate, and families have also invested a large amount of money in real estate. Then, the sharp drop in real estate prices has led to many households with negative assets, and companies also have a large amount of debt. Under these circumstances, he said that after companies make money in their original industries, they can only repay loans to banks instead of continuously investing money in reproduction. Families also take their regular income to repay bank loans, reducing consumption. Therefore, the entire economy appears to be very weak. This is what is called the decline of the balance sheets.” On the surface, it appears to be this way, but I believe the most important reason is that after the Plaza Accord in the 1980s, the United States forced Japan to abandon the then world-leading semiconductor industry. Just like what the United States said to Huawei, “You cannot develop 5G smartphones.” At that time, the United States said to Japan, “You cannot develop the semiconductor industry.” Therefore, Japan was forced to give up the semiconductor industry. At the same time, not only did Japan abandon the semiconductor industry, but Japan also accepted the idea that “government resources cannot be used to support certain industries” from the United States. Japan originally had many industrial policies to support the development of new industries, but after the 1980s, it accepted the ideology of neoliberalism, believing that the government should not have industrial policies and should let the market play a role and let companies develop independently. As a result, since the 1980s, it has given up its originally leading industries, and there have been no new industries. Do you believe that Japan has any new technologies that are leading internationally? I don’t think you can come up with any, because there are basically none!

So, the earlier mentioned development of semiconductors relies on continuous technological innovation and industrial upgrading. If you do not transform your technology and upgrade your industry, the productivity level cannot be improved, and the income level cannot be improved, which then causes the ability of banks to repay loans to become a problem. Therefore, Japan’s problem is not that companies and banks have high debt, but the lack of continuous technological innovation and industrial upgrading! It can be said that this is due to the suppression of US policies. In the 1970s and 1980s, Japan’s per capita GDP was slightly higher than that of the United States, indicating that its average labor productivity was higher than that of the United States because it had the semiconductor industry with globally leading technology at that time. But now, Japan’s per capita GDP is only 50% of the United States’, and Japan’s economy is only one-fifth the size of the United States’. Because Japan’s labor productivity has not improved or stagnated, it has led to the overall economic decline of Japan.

Let’s return to China. Will China fall into the balance sheet decline that Mr. Go Chao Ming（Richard Koo） mentioned? It depends on whether we have room for technological improvement and industrial upgrading. We have the advantage of being a latecomer and the advantage of a new economy. Even if the United States wants to hold us back, it won’t be able to. I believe that China can improve its productivity level and drive income growth through technological innovation and industrial upgrading. Therefore, the decline of the balance sheets and the contraction of the real estate market are not obstacles to China’s development, and China will not fall into the same fate as Japan.

Another issue that has been widely discussed is the problem of population aging. Indeed, according to statistical indicators, as long as the proportion of people over 60 years old in the population exceeds 10%, it is considered population aging. China has indeed entered an aging society, and the most important impact is that the population is not growing, and the number of laborers is not increasing. Japan has also entered an aging society, and some people say that Japan’s slow economic growth is also due to population aging, which means that China, now entering an aging society, will also experience slow economic growth like Japan. However, in reality, Japan’s slow economic growth is not due to population aging, and I have done some analysis on this.

Since World War II, 53 countries have entered population aging, among which 26 countries have reached or exceeded the per capita GDP of the United States, while 27 countries have less than half of the per capita GDP of the United States. If you compare the economic growth of these 26 high-income countries before and after entering aging, you will find that there is not much change. It only slightly decreases after entering aging. Then, if you look at those 27 countries that are still catching up, if you compare their economic growth in the first ten years and the last ten years, you will find that their economic growth in the last ten years is still improving. Just like Japan, the economic growth is very slow, but it is different. Actually, if you think about it carefully, it makes sense because economic growth relies on continuously improving productivity, which is achieved through technological innovation and industrial upgrading. As the level of technology improves, the labor force involved in industries becomes not just about quantity but also about quality.

Population aging is usually predictable. When you anticipate the trend of population aging approaching, the government can increase investment in education to continue improving the quality of the existing labor force because the influx of new labor force will stagnate. Therefore, for countries that have already reached the highest income level, their technological innovation must rely on their own inventions, but it may be slower. On the other hand, for countries that are catching up, they have the advantage of being latecomers and have more room for technological innovation and industrial upgrading. Moreover, they can better prepare in terms of education investment and seize the opportunities for technological innovation and industrial upgrading. As a result, the development of these countries is actually faster.

Therefore, it is incorrect to say that Japan’s economic growth slowed down after entering aging. Japan’s slow economic growth is not due to population aging but rather, as mentioned earlier, due to the suppression of US policies and the influence of neoliberalism in the United States. Japan voluntarily gave up new technologies that could be used for industrial upgrading, and the government did not actively support the development of new industries, resulting in a lack of technological innovation and industrial upgrading, which led to slow economic development. I believe that China can completely avoid such results.