Will China's Growth Machine Suddenly Implode - Like Japan's Did?

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Includes: CHN, CN, CXSE, FCA, FLCH, FXP, GXC, KGRN, PGJ, TDF, WCHN, XPP, YANG, YINN, YXI
by: Louis Navellier
Summary

The world's highest official debt-to-GDP ratio today is Japan's at 236%, but China's unofficial rate is 300%.

The Financial Times reported on May 31 that China's GDP growth forecast reached a 30-year low and its manufacturing employment index reached a 10-year low.

Their official manufacturing PMI for May fell to 49.4, down from 50.1 in April, and the index tracking new export orders fell a shocking 3.7 points, from 49.2 to 46.5.

Originally published on June 11, 2019

By Gary Alexander

Will China's Growth Machine Suddenly Implode - Like Japan's Did?

We celebrated the 75th anniversary of D-Day last week - as well we should. That day was important. It marked the beginning of the end of the European War. But the same dates also marked the beginning of the end for Japan in the Battle of Midway, June 4-7, 1942. Breaking the Japanese code, the U.S. Navy inflicted devastating damage on the Japanese fleet that proved irreparable - just six months after Pearl Harbor. The Japanese fleet never again made a serious advance toward America. Military historian John Keegan called Midway "the most stunning and decisive blow in the history of naval warfare."

A quarter century later, after graduating from college with a journalism focus and an economic interest, my first job was to take a look at how Japan survived the massive bombing we inflicted upon them in World War II. In a series of three articles in early 1968, I began the first article, "Japan, Industrial Supergiant," by saying Japan's population had skyrocketed 50% in the previous 20 years, making it the world's fifth most populous nation, with over 100 million people, but industrially it had risen faster:

"By 1951 - six short years after the war's total destruction - Japanese industrial output was back to prewar levels. And by 1967, Japan reached a tie for third place (with West Germany) in industrial output, and fourth (behind the U.S., USSR and West Germany) in Gross National Product. The amazing part of this economic miracle is Japan's growth rate. While the huge world powers are satisfied with a two or three percent yearly increase, Japan has averaged a level 10% yearly increase for over a decade! Today, Japan is number one in production of ships, motorcycles, transistor radios, quality cameras, and sewing machines. She is a close second or third in such all-important industries as steel, chemicals, automobiles, paper, and electronics."

- from "Japan, Industrial Supergiant" by Gary Alexander, Plain Truth magazine, January 1968

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

But it didn't stay #1 for long. As this chart shows, Japan's growth rate began to slow in 1975, and its population growth ground to a halt in the year 2000, when it reached 125 million and stayed there. Many demographers now predict that Japan's aging population will revert back to 100 million by 2050 or 2060.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In "Japan as Number One" (1979), Harvard sociologist Ezra Vogel positioned Japan as a superhuman Hercules and Einstein rolled into one, with wise but silent Samurai who knew everything, led by a government and business consortium that worked tightly for the greater glory of the nation, using state-owned banks that provided loans on demand, and workers who rose early to sing the corporation's glory.

Japan was so rich with asset inflation by the late 1980s that choice properties in Tokyo sold for $1.5 million per square meter ($140,000 per square foot). It was said that one square mile of Tokyo property was worth more than all of the state of California. When I heard that, I simply said, "No, it isn't!"

Japan's stock market index, the Nikkei 225, peaked just shy of 39,000 on December 29, 1989, on the last trading day of the 1980s. It fell below 10,000 by 2012 and trades around 20,000 now. While the Dow Jones index is 10 times its 1989 level, the Nikkei is barely one half its level of 30 years ago.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In the first quarter of 2017, Japan's GDP growth rate was 0.8% vs. the U.S. GDP rate of 3.1%, about four-fold faster. But that's normal. Since 1994, Japan's economy has averaged 0.8% growth per year.

China's Growth Rates are Already Slowing Dramatically

The world's highest official debt-to-GDP ratio today is Japan's at 236%, but China's unofficial rate is 300%. In the early 2000s, a rash of books and articles came out saying the same things about China that we once heard about Japan - that their 12% annual GDP growth rate would put them into global leadership ahead of the U.S. by 2030 or sooner. Their causes were the same - their education system is superior to ours; their government works directly with business and captive banks for managed loans to favored industries such as targeted export-centered enterprise zones for markets to specific nations, etc.

But too much was financed by debt. The financial costs are piling up. The Financial Times reported on May 31 that China's GDP growth forecast reached a 30-year low and its manufacturing employment index reached a 10-year low. Their official manufacturing PMI for May fell to 49.4, down from 50.1 in April, and the index tracking new export orders fell a shocking 3.7 points, from 49.2 to 46.5.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

China is in danger of going the way of Japan if they don't change their ways. The factories which now dominate China's coastal landscape can easily be moved to adjoining nations, just like "Made in Japan" in the 1960s became "Made in Taiwan" and then "Made in Hong Kong" and "Made in South Korea" before those nations got rich and "Made in China" came into vogue. There are plenty of poor nations in Asia, Africa, and elsewhere that are willing to make goods for export if China doesn't learn to play fairly.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.