China is different from Japan in the 1990s, as it has a strong foundation, a huge domestic market and is a top exporter and will not suffer from an economic recession as Japan did, the chief economist at Zhongtai Securities said recently.

Japan was too reliant on the real estate sector back in the 1990s, and so when the Japanese yen started to appreciate, economic growth slowed, Li Xunlei said at a forum held by Shanghai University of Finance and Economics on July 4.

Japan hasn’t made much progress in manufacturing and high-end industries over the past 30 years, Li said. But China has seized opportunities in the fields of new energy and internet, such as the fifth-generation mobile network and electric cars, he added.

And unlike Japan, China has long-term national strategies and plans for the development of the manufacturing sector as well as a large domestic market, Li said.

“A major reason for the drop in Japan’s exports in the 1990s was the big jump in exports out of China. But today, no one is close to catching up with China in this respect.”

India, for example, has low labor costs but its exports are not growing fast, while Vietnam’s exports are on the rise but it only has a small economy. So China has great advantages compared with Japan back in the 1990s, Li said.

Debt Burden

It is difficult for China’s investment-led economic growth to be sustainable, and the difficulty lies in debts and residents’ income structure, he added.

“Based on preliminary estimates, around 40 percent of social financing costs is spent on paying back interest,” he said.

Debts make it difficult for China to improve economic quality, so the top priority now is to cut the cost of government debts, Li said.

The leverage ratio of local governments is high, but that of the central government is low, so the central government has more credit than local governments, Li said. Local government debts should be replaced by central government debts to cut local governments’ financing costs and to give them more strength to develop the economy.

A high-level of opening-up is necessary to maintain the sustainability of China’s economic expansion, he said. “China’s economy is facing downward pressure as growth in the real estate sector is waning. It will likely come under greater pressure if the manufacturing sector continues to shrink.”

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