There's That Definition of Insanity Again

Hey, remember when we used to laugh at Japan’s real estate bubble? The one that brought an end to Japan Inc as a global growth engine? The one that gave Japan two lost decades? Then remember how we had our own real estate bubble? And then it popped? And now we’re re-inflating it?

Good times, good times.

Anyway, China might be next:

Over at JPMorgan Chase & Co. in Hong Kong, investor inquiries on the similarities between China and Japan drove Grace Ng to revisit the topic. She warns that China today and Japan in the 1980s share an uncannily similar buildup in broad measures of credit to almost double their economies’ size.

So, just how susceptible is China to Japanization? Very, actually, and only bold and creative action on the part of President Xi Jinping and Premier Li Keqiang can avoid it. Think of their 10-year term that began in March as China’s make-or-break period to dodge a major debt crisis.

Domestically, Japan’s popped bubble wasn’t the end of the world. Japan was (and is) rich, and you don’t need a hugely-expanding GDP when you have a shrinking population. Per capita GDP there is still high and still growing, and that’s the real measure of success.

China, too, has a shrinking population, which in this particular could be a good thing. But unlike Japan, China is not yet over the demographic hump where the working age population is still growing, as farmers leave the interior to search for work in the coastal cities. China still needs a hugely-expanding GDP to accommodate all the additional people entering the urban workforce.

China shares another problem with Japan, and that’s a quickly-growing population of retirees, without enough younger taxpayers to provide for their retirement. Japan has enough “excess” GDP, and good enough credit to pay for it all. China has no such luxuries, and may indeed fulfill Mark Steyn’s prophecy that it will be the first country to “grow old before it gets rich.”

The very things that eased Japan’s Lost Decades will compound China’s troubles when the bubbles pop.

Good times, good times.