Japan Then, China Now

Government debt as a percentage of GDP

1 Japan 227.7
2 Zimbabwe 181
3 Greece 174.5
4 Lebanon 142.4
5 Italy 134.1
6 Jamaica 132
7 Portugal 131
8 Cyprus 119.4
9 Ireland 118.9
10 Grenada 110
11 Singapore 106.7
12 Belgium 101.9
13 Eritrea 101.3
14 Barbados 101.2
15 Spain 97.6
16 France 95.5
17 Iceland 94
18 Egypt 93.8
19 Puerto Rico 93.6
20 Canada 92.6
21 Bhutan 91.5
22 Jordan 90
23 Antigua and Barbuda 89
24 United Kingdom 86.6
25 Cabo Verde 86.2
26 Saint Kitts and Nevis 83
27 Austria 80.2
28 Belize 79.6
29 Hungary 78.2
30 Sri Lanka 78.2
31 Sao Tome and Principe 77.1
32 Saint Lucia 77
33 Morocco 76.6
34 Malta 75.3
35 Germany 74.7
36 Ghana 72.7
37 Albania 71.4
38 Sudan 71.3
39 United States 71.2
40 Croatia 70.3
41 Dominica 70
42 Netherlands 69.4
43 Israel 67.4
44 Saint Vincent and the Grenadines 67
45 Aruba 67
46 Ukraine 66.2
47 Serbia 65
48 Uruguay 64.7
49 Seychelles 64.5
50 Pakistan 64.3
51 El Salvador 63.4
52 Mauritius 61.4
53 Slovenia 59.8
54 Finland 59.6
55 Costa Rica 59.4
56 Brazil 59.3
57 Kenya 58.9
58 Slovakia 58.5
59 Guyana 58
60 Bahamas, The 57.6
61 Syria 57.3
62 Ethiopia 55.1
63 Malaysia 54.2
64 Fiji 52.3
65 Montenegro 52.1
66 Venezuela 51.4
67 India 51.3
68 Yemen 51
69 Trinidad and Tobago 50.6
70 Tunisia 49.9
71 Thailand 48.6
72 Philippines 48.4
73 Dominican Republic 48.2
74 Malawi 48
75 Senegal 47.5
76 South Africa 47.3
77 Mozambique 47.2
78 Laos 46.2
79 Poland 45.6
80 Vietnam 45.5
81 Bosnia and Herzegovina 45.5
82 Denmark 44.3
83 Honduras 44.3
84 United Arab Emirates 44.2
85 Czech Republic 43.5
86 Bahrain 43.4
87 Cote d'Ivoire 42.9
88 Tanzania 42.9
89 Armenia 42.4
90 Colombia 41.9
91 Andorra 41.1
92 West Bank 41
93 Mexico 41
94 Cuba 40.6
95 Nicaragua 40.6
96 Sweden 40.2
97 Romania 39.4
98 Lithuania 38.7
99 Burundi 38.6
100 Djibouti 38.6
101 Argentina 37.9
102 Zambia 37.3
103 Korea, South 37.2
104 Panama 37.2
105 Hong Kong 37
106 Latvia 36.5
107 Taiwan 36.5
108 Turkey 36.5
109 Georgia 36.3
110 Uganda 35.7
111 Bolivia 35.3
112 New Zealand 35.3
113 Switzerland 34.7
114 Australia 34.5
115 Chad 34.5
116 Macedonia 34
117 Congo, Democratic Republic of the 33.4
118 Curacao 33.2
119 Papua New Guinea 32.3
120 Mali 32.1
121 Rwanda 31.4
122 Congo, Republic of the 30.2
123 Benin 30.1
124 Sierra Leone 30.1
125 Qatar 30
126 Nepal 30
127 Ecuador 30
128 Guatemala 29.9
129 Norway 29.6
130 Namibia 28.6
131 Bangladesh 28.6
132 San Marino 25.8
133 Indonesia 23.9
134 Luxembourg 23.2
135 Bulgaria 22.9
136 Cameroon 22.7
137 China 22.4
138 Belarus 22.3
139 Anguilla 19.5
140 Moldova 18.9
141 Paraguay 18.4
142 Gabon 17.7
143 Botswana 17.4
144 Chile 16.5
145 Peru 15.9
146 Angola 13.9
147 Russia 13.4
148 Kazakhstan 12.1
149 Nigeria 11.7
150 Iran 11.4
151 Azerbaijan 10.7
152 Estonia 9.9
153 Kosovo 9.1
154 Equatorial Guinea 8.4
155 Liberia 8.1
156 Algeria 7.5
157 Uzbekistan 7.5
158 Gibraltar 7.5
159 Kuwait 6.8
160 Tajikistan 6.5
161 Wallis and Futuna 5.6
162 Oman 4.7
163 Libya 2.9
164 Saudi Arabia 1.6
Source:
CIA World Factbook
(as of August 30, 2015 -- it is continuously updated so later lookups will show different data)

To follow this discussion, you may wish to read "Lesson From Japan" from three years ago. The first paragraph of the essay was:

It is the year 1990. The most dynamic economy in the world is Japan's. The Nikkei Dow (their major stock market index) is flirting with 40,000. Japan's trade balance is massively positive thanks to Japan's program of keeping the value of the yen low. Public debt to Gross Domestic Product was a very manageable 68% (IMF figures, official government figures have it below 50%). Headlines were proclaiming that Japan, Inc. would own the world.

Something happened on the way to the forum. The minor world recession of 1990 was nearly as bad for Japan as the Great Depression of the 1930's was for the US. It was so devastating that twenty-five years later the Nikkei 225 is half of what it was January 1, 1990, and public debt as percentage of GDP (top of list) is still unmanageably high.

Just before Japan was crashing, China began rising, treading the same path that Japan had used: low currency value, high exports, banks making below market rate loans to businesses and artificial barriers to imports. China is (or at least before June was) expected to overtake the US economically within a few decades. Unfortunately, I fear China may have a lot of trouble overtaking China as of 2015.

On the chart on the right, you'll find China at a reassuring 22.4% way down at 137 on the list. If that were the actual picture, things would be rosy. Just as Japan's debt/GDP numbers appeared manageable in 1990, there is a huge problem. China followed Japan's path of requiring its banks (most are government owned) to finance schemes the government thought would be productive. Billions were spent on real estate that is empty and decaying. There will be no return on those loans. Ditto for too many of the manufacturing plants that never achieved revenue approaching initial projections. A decade ago China said they needed at least 8% growth per year to keep things afloat. Export growth dipped to 7.3% in 2014 and they now project 2015 growth at 7% and believe that will be enough. They have made sufficient reforms to suggest that this may be a reasonable estimate. However, quite a few expect real growth to end up around 5% this year. That would be a problem.

No country can afford to allow its banks to go broke. If they did, there would be no savings accounts, no credit cards, no loans for cars, etc. Civilization as we know it requires banks. Just as the Fed in 2008 did everything it could possibly do to save US banks, China will also be forced to monetize the debt of the banks. "Monetize" is a fancy way of saying that the debt of the banks will become the debts of the nation. This saves the banks, but at a huge cost. Current estimates suggest that China's debt could end up somewhere around 250% of GDP. I cannot find sources for these estimates, so let's just say a crash like Japan's in 1990 or the US in 2008 would put China in Japan's class as a debtor nation.

Obviously, China's leadership understands the problem, but opinions are mixed on whether their answers are proper. China has reduced the value of the yuan (its currency) twice in a month, uncoupling it from the US dollar, to attempt to prop up exports. An unfortunate side-effect is that massive amounts of money have left the country looking for higher returns. A liquidity squeeze is not a desired outcome. Banks have been ordered to prop up the stock market through massive purchases. In the event of a hard landing, stock market losses will only add to the monetization burden. Investors in China clearly understand the issues. Every time banks step up their support of the market, investors take the opportunity to leave the playground.

China has taken massive steps to grow their internal economy, reducing dependence on exports. China's export/import ratio is currently below Germany's. China has moved massive numbers of rural dwellers into cities to populate a flotilla of new enterprises with workers. If China has a soft-landing from the current crisis, all well and good. But if massive numbers of non-performing industries are shuttered, where do the people go and what do they do? This has to be the source of Chinese bureaucrats' worst nightmares.

How this all plays out is uncertain. What isn't uncertain is that China will not be growing at anything like 8% for the next half-decade. Probably, 5% is out of the question. Their room for error is so small that it is hard to imagine they can make it without considerable pain. And they aren't without external land mines. Any weakness in the EU could crush any hopes China has for a soft landing. With GDP growth in the EU at just about zero, China could easily suffer a follow-on downturn from its most important export market.

As has been made abundantly clear by the reactions of the world stock markets to the problems in China's stock market, the result of China's problems will have a huge effect on all of us, just as the world suffered considerably from the primarily US recession of 2008. Increasingly, we are all in this together, which is why every time China's stock market suffers, the rest of the world heads south as well.

September 13, 2015