TOKYO – Consider this for an irony of mega proportions.
China’s new five-year plan is causing consternation in Tokyo as officials realize the breadth of Xi Jinping’s ambitions. Yet Japan’s past should, in turn, be generating consternation in Beijing.
If investors could take a time machine back to 1960, the plans of then-Japanese Prime Minister Nobusuke Kishi would sound very familiar. Granted, the details, vernacular and geopolitical contexts are vastly different today. But President Xi’s “new development philosophy” would fit neatly in Kishi’s roadmap.
Is China’s plan to achieve technological leadership focused on self-sufficiency? Yup. Concerned with ensuring that global integration better serves China’s domestic interests? Check.
Does it seek to morph the domestic market into a strong gravitational force? Most definitely. Are overseas infrastructure projects a major source of friendship building, like Tokyo’s “checkbook diplomacy” model? Certainly.
And is China’s latest roadmap heavy on soaring ambition, light on specifics? Sadly – that too, yes.
This last similarity between Japan’s industrialization and where Xi’s Communist Party is steering things is most notable. It’s arguably the biggest Japanese lesson Beijing should be internalizing.
Meiji, redux
Historians generally link Japan’s industrialization to the 1860s. That time of epic political and cultural upheaval spanned the end of the Edo era and the start of the Meiji Restoration culminated in a rapid embrace of Western ideas, production methods and previously unthinkable levels of international engagement.
The real turbocharge-moment that interests China, though, is 1949 – the year Tokyo created the forerunner of today’s Ministry of Economy, Trade and Industry, or METI.
That was when eight different institutions were put under one roof to drive Japan’s postwar resurgence, including the bureaus of trade, enterprises, innovation, textiles, machinery, chemicals and iron and steel.
What Xi is endeavoring to do with “Made in China 2025,” METI and its state-led technological renaissance tried to do decades earlier.
The scale is vastly different, of course. With 1.4 billion people and the world’s second-biggest economic engine, China’s dominance has a certain aura of inevitability hanging over it that Japan’s didn’t.
Still, Japanese lessons abound as Xi’s China makes a run at owning the industries of the future – from (deep breath): aerospace to artificial intelligence to automation to biotechnology to digital currencies to electric vehicles to 5G advancements to renewable energy to robots to semiconductors to creating enough “unicorn” startups to make Silicon Valley East a reality.
The most important lesson is that bold plans are great – but implementation matters far more.
“The de-emphasis of [Chinese] growth targets in recent years has been accompanied by an increase in more sector-specific interventions,” says Andrew Batson at Gavekal Research. “There has been a large-scale revival of industrial policy since around 2015, most famously in the ‘Made in China 2025’ plan, but also in a plethora of other programs. The new five-year plan carries forward that trend: its central themes are innovation and technological self-reliance, which are presented as the only way for China to deal with overlapping challenges of technological disruption, climate change and geopolitical uncertainty.”
Here’s the rub.
The idea of “innovation” is difficult to define or measure. In theory, demanding more of it, commendable as that is, means allotting more resources into specific sectors seen as innovative.
The new plan, Batson notes, “calls for major programs in ‘strategic’ areas such as artificial intelligence, integrated circuits, and biotechnology. The risk to this shift in priorities is clear. If officials are judged less by whether they can deliver growth than whether they can shovel money at ‘innovation’-related projects, then the risk of waste and distortions has not necessarily been reduced – and could increase.”
It’s a problem that has emerged time and time again in Japan Inc circles since the 1960s: too much state money chasing too few new ideas and products squanders resources and productivity, while stymying efforts to create a vibrant startup scene.
That’s the thing with national champions: they can slow disruption and progress.
Nor has Xi spelled out how to ensure excesses and waste don’t get the better of innovation ambitions – or how to keep financial system inefficiencies from complicating things. A major Xi push at the moment, for example, is raising China’s game in electronics, green energy and other select domestic industries. Odds are, much of this financing will flow from the state-owned banking sector.
Might China’s innovation push, then, end up further cementing the role of state banks in counterintuitive ways?
This same dynamic in Tokyo explains why decades after Japan’s innovation boom, Japan is still a place where four megabanks dominate all else.
And that is also why, it’s worth noting, Jack Ma of Ant Group fame/infamy doesn’t have a direct counterpart in Japan endeavoring to revolutionize the fintech space.
Then there is the green scene. Some observers worry that the hoopla surrounding Beijing’s “going-green” plans is not reflected in actual drafts.
“As the first five-year plan after China committed to reach carbon neutrality by 2060, the 14th five-year plan was expected to demonstrate strong climate ambitions,” says economist Zhang Shuwei at Draworld Environment Research Center. “However, the draft plan presented does not seem to meet expectations. The international community expected China’s climate policy to ‘jump’ – but in reality it is still crawling.”
Another lesson from Japan? Only a strong underlying financial system can take an economy global. Dating back to the days of Xi’s predecessor, President Hu Jintao, China has too often viewed the mere act of opening its economy as a reform in itself, just as Japan did decades earlier.
China has been remarkably active in using the Belt and Road Initiative to grow its influence around the globe. But that is, in some ways, just a supersized version of Japan’s decades-old Overseas Development Assistance, or ODA, scheme.
But there is a bigger issue: A nation’s global footprint is only as credible as the underlying system supporting it.
Where’s the market focus?
Xi’s economy has yet to do the hard work of turning his rhetoric about market forces playing a “decisive” role into bold action.
Topping the to-do list (take another deep breath): increasing transparency and efficiency; cutting bureaucracy; curbing corruption; creating a trusted credit-rating system; making sure governing institutions get priorities right; tolerating big debt defaults; allowing full exchange-rate convertibility.
The yuan’s inclusion in the International Monetary Fund’s top-five currency club marks progress. So does the inclusion of mainland stocks in MSCI’s indexes and Chinese debt in global benchmarks like FTSE Russell.
All good, but none of these milestones ensures China will successfully address excessive debt and credit or rein in the shadow banking industry any better than Japan did in the 1990s.
The Bank of Japan’s travails these last 20 years are their own lesson for Xi and the People’s Bank of China. The BOJ is, not surprisingly, the role model for most Asian neighbors, including China. In fact, even now, the BOJ has a sizable staff presence in Beijing, where its team has long offered technical support.
Granted, over the last year of Covid-19 disruptions, the PBOC has been far less generous with monetary support than the BOJ or the Federal Reserve.
But given the debt-and-credit-driven growth model that China brought to the crisis, the BOJ lessons still resonate deeply. The main one: excessive monetary stimulus is no substitute for government efforts to generate demand-led growth.
For now, Beijing’s plans to grow just 6% this year have international rating companies breathing a sigh of relief.
Last July, for example, Fitch Ratings warned that a “sharp rise in financial vulnerabilities, for example through failure to taper credit growth to a level close to nominal GDP growth over the next few years, could pose downside risks to the rating.”
After the latest National People’s Congress, says Fitch analyst Stephen Schwartz, “We expect the government to gradually place less emphasis on GDP growth targets in the coming years, in line with its growing focus on job creation and unemployment.”
That dynamic, Schwartz says, suggests the “economy-wide leverage ratio will broadly stabilize in 2021, after rising by more than 20% of GDP in 2020.”
Yet as Covid-19 risks continue to cloud the global outlook, it’s vital for PBOC Governor Yi Gang to avoid going the BOJ route and opening the monetary floodgates.
One final Japan lesson worth heeding: it’s easier for a sizable economy to play catchup than to lead.
Where China lags
One key difference between China and Japan is that its population got rich before it got old. Japan was a mature, wealthy, stable spot that had already won a place in the Group of Seven nations when things unraveled in the early 1990s.
China is different. The aging, high-indebted nation and its sub-$11,000 per capita income level will face compressed challenges that come earlier in national development.
Other headwinds Japan did not face include limited press freedom, a fragmented corporate credit rating system and an opaque rule-of-law matrix.
Granted, the internet wasn’t a thing when Japan’s 1980s bubble economy imploded. Even so, Jun Okumura, a former METI official, has long questioned how Beijing’s “stifling of cyber-freedom” could coexist with an innovative boom that raises wealth and living standards.
Is the legacy of these policies, and the centrality of the state sector, impeding China’s ambitions in key tech sectors? It’s a question that Brookings Institution fellow Christopher Thomas can’t help but apply to China’s failure in semiconductors.
Despite efforts to ramp up the Chinese semiconductor industry, Thomas says, the “regional structure of the industry — based on the global distribution of market share using company headquarters location — was essentially unchanged in 2020 compared to 2014, and there has been no major shift to China in that time period. Chinese players remain decades behind in some of the most important manufacturing technology areas, such as lithography and the most advanced software design tools.”
US President Donald Trump’s trade war didn’t help, but Thomas says, “despite the economic logic that would drive Chinese companies to globalize, many Chinese companies in the semiconductor value chain, from startups to established players, are quietly pursuing supply chain ‘indigenization’ strategies.”
Tristan Kenderdine of consultancy Future Risk takes things a step further. When he looks at China’s 2020s through the lens of Japan’s 1960s, and how obsessed Xi is with self-sufficiency, he arrives at an unlikely place: the Soviet Union.
“In science and technology innovation,” Kenderdine says, “closed markets, proprietary standards, and ideologized scientific research policy are a recipe for retrogradation.”
Japan’s own-goal in this regard was termed the “Galápagos syndrome.” For decades, Japan invented new species of highly-evolved, game-changing products that thrived at home but not so much beyond the water’s edge.
At first, Apple’s iPhone was slow to catch on in Japan, where cameras and high-speed internet on handsets were old-hat. It never occurred to Japan Inc. to go global with those technologies – leaving the field wide open for Steve Jobs.
Kenderdine worries that “China now in 2020 is more like a hybrid form of what Japan and the Soviet Union were in 1986 – a real-estate investment-driven bubble economy, which has defied the odds to become a world leader in some technology areas; alongside a creaking, massively geographically distributed, industrial-command-economy-production model that is policy-prioritizing high-technology breakthroughs but still dependent on unreliable or inefficient energy and labor inputs.”
There are good reasons to suspect that Xi’s team will figure all this out. Investors, it’s worth noting, haven’t made much money betting against China and its grand ambitions. But Japan once had some rather epic designs on economic dominance of its own.
They are designs that Xi would be wise to examine anew today.