The growth slowdown in China in the second decade of the new millennium has been the longest lasting such episode in the country's recent history. While many simply argue that China's slowdown resembles Japan's experience in the early 1990s with the burst of bubbles in real estate and stock markets and hence a serious debt overhang, we consider the slowdown premature in that China has only accomplished half of what Japan had achieved in terms of per capital income level. Instead of attempting to explore the key factors behind such a premature slowdown, among which policy-induced early aging, institutional problems, and the sheer relative size of China, are major candidates, we establish sound empirical evidence on the magnitude and timing of China's growth performance with better constructed data for both the post-reform era and over the long run.
We first look at what the official macroeconomic data has to say on the extent and characteristics of the industrial growth slowdown and propose a data reconstruction in order to avoid the well-known biases associated with such official data. We do this both with a short run perspective, with monthly data over more than three and a half decades, and a long-run one with yearly data over a century. In as much as Japan experienced the end of catching-up, we compare Japan's growth experience with China's over both frequencies. We focus on industrial growth in as much as to date, this has been the only basis of catching up as shown by the experience of all existing industrialized countries (Rodrick, 2007).
Our regime-switching analysis with the two types of data shows three series of striking similarities between the experience of the middle kingdom and that of the country of the rising sun. First, contrary to what official data tells us, China started its rapid growth episode not in 1980, but in the early 2000s, at a per capita industrial output level which Japan reached at the start of its own rapid growth episode in the early 1960s. Second, per capita industrial growth stagnation started in Japan in 1980, with a share of senior people (65 or above) in total population which China reached in the early 2010s (end of the demographic dividend) when its industrial rapid growth episode similarly ended. Third, the growth collapse in China over the last five years in no way represents a return to an old normal of moderate growth. The associated balance-sheet recession recalls Japan's early 1990s experience. The mother of all stimulus packages, engineered by the Chinese government through bank credit expansion in the first half of 2009, bears striking resemblance to the expansion in bank credit in Japan in the late 1990s.
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