Over the past few months, China has allowed the yuan to further decline in value, worrying the entire global economy about devaluing other currencies in order to maintain a strong export.
Western pundits used to believe that the 21st century will be “The Pacific Century”, with the booming economies of South Korea, Japan, and Taiwan leading South East Asia. While Japan had stumbled along the way in the 1990s, it is safe to say that China has become more and more successful each year— fulfilling the late 20th century ‘prophecy’. This makes today’s economic woes a lot funnier; China and Japan are now bringing much economic concern to the entire world.
What’s Happening to Japan?
Last month, the Bank of Japan (BOJ) decided on a policy of negative interest rates in response to another further deflation. Japan has maintained a zero interest rate policy (ZIRP) for long. Prime Minister Shinzo Abe’s “Abenomics” has promised structural reforms that were intended to uplift the economy— but they have not.
If the quantitative easing policy continues even just for a few years, the balance sheet of BOJ will be greater than the country’s entire economy by 2018.
Beijing vs. Tokyo
It is needless to say that China and Japan share a fierce geopolitical and economic rivalry. Beijing is far from what is currently being served on Tokyo’s plate. Asia’s largest economy’s growth is still at a rate of 6% to 7% annually. Personal income in China is still growing, driving retail sales growth with over 10% last year.
However, China shares the similar dilemma with Japan— the rising debts and weakening growth rate. Accordingly, about 2.50 yuan is needed to generate a single yuan of additional output. Basically, it takes additional $1.70 trillion fresh loans in order for China to achieve its growth target of 6.50%.
Furthermore, China’s foreign exchange reserves lost about $100 billion to just $3.20 trillion, hitting four-year lows. Given this, about 54 trillion yuan is necessary just to keep up with the government’s 6.50% target. Analysts believe that the worsening debt problems of China will be challenged by the growth rate that becomes slower and slower each day.