11

Overcoming JapanOvercoming Japans China s China SyndromeSyndrome

C. H. KwanC. H. Kwan

AprilApril20022002

RIETI http://www.rieti.go.jp/en/index.html

22

From Pessimism to OptimismFrom Pessimism to Optimism

From devaluation to revaluation of From devaluation to revaluation of Chinese Yuan Chinese Yuan From From who would feed Chinawho would feed China to to safeguard against Chinese agricultural safeguard against Chinese agricultural productsproductsImpact of IT Revolution: From digital divide Impact of IT Revolution: From digital divide to leapfroggingto leapfroggingJapanJapans loss of confidences loss of confidence

33

An Objective Evaluation of An Objective Evaluation of ChinaChinas Economic Powers Economic Power

GDP level instead of rate of changeGDP level instead of rate of changeHigh share of foreign companies and High share of foreign companies and import contentimport contentDisparities between coastal and inland Disparities between coastal and inland regionsregions

44

Comparison between Major Development Comparison between Major Development Indicators of China and JapanIndicators of China and Japan

1236123619601960

1071107120002000

Per Capita Electricity Per Capita Electricity Consumption (Consumption (kwhkwh))

38.838.819601960

39.239.220002000

EngelEngel s Coefficients CoefficientIn Urban Areas (%)In Urban Areas (%)

Source: China Statistics Abstract, Japans 100 Years (Kokuseisha).

16.716.719591959

15.915.920002000

Primary Sector as a Share of Primary Sector as a Share of GDP (%)GDP (%)

30.730.719601960

313119991999

Infant Mortality RateInfant Mortality Rate(per thousand)(per thousand)

1965196519981998

67.7467.7472.9272.9268687272Life Expectancy (years)Life Expectancy (years)

MaleMaleFemaleFemaleMaleMaleFemaleFemale

JapanJapanAround 1960Around 1960

ChinaChinaLatestLatest

55

Competition between China and Competition between China and JapanJapan

Japan

China

Amount

Shoes TV SemiconductorProduct Sophistication Index ($)

Low-tech Products High-tech Products

66

Calculation of Product Calculation of Product Sophistication IndexesSophistication Indexes

Low-tech Products Shoes

Mid-tech Products

TV

High-tech Products

Semiconductor

Share

Per capita GDP of exporters

Product Sophistication Index of Semiconductor

Product Sophistication Index of TV

Product Sophistication Index of Shoes

$1,000 $5,000 $30,000

77

Competition between China and Competition between China and Japan in the U.S. MarketJapan in the U.S. Market

0

10

20

30

40

100 1 ,000 10 ,000 100 ,000

1990

Product Sophistication Index ($)

(Billion dollars)

JapanChina

0

10

20

30

40

100 1 ,000 10 ,000 100 ,000

1995

Product Sophistication Index ($)

(Billion dollars)

JapanChina

0

10

20

30

40

100 1 ,000 10 ,000 100 ,000

2000

Product Sophistication Index ($)

(Billion dollars)

JapanChina

Low-tech Products High-tech Products

88

Asian CountriesAsian Countries Competition Competition with Chinawith China

1990 1995 2000Japan 3.0% 8.3% 16.3%South Korea 24.0% 27.1% 37.5%Taiwan 26.7% 38.7% 48.5%Hong Kong 42.5% 50.5% 55.9%Singapore 14.8% 19.2% 35.8%Indonesia 85.3% 85.5% 82.8%Malaysia 37.1% 38.9% 48.7%Philippines 46.3% 47.8% 46.1%Thailand 42.2% 56.3% 65.4%

99

Japan Competes only about 10% Japan Competes only about 10% with Chinawith China

Division of labor within each product Division of labor within each product categorycategory

---- LowerLower--end versus higherend versus higher--end productsend productsHigh import contents of Chinese products High import contents of Chinese products Actual degree of competition with China Actual degree of competition with China about 10% for Japanabout 10% for Japan

1010

The Rise of China: Implications The Rise of China: Implications for Relative Pricesfor Relative Prices

Terms of trade = Export prices / Import pricesTerms of trade = Export prices / Import prices

ChinaChinas TOT falls s TOT falls immiserizingimmiserizing growth growth ASEAN ASEAN Terms of trade fall with ChinaTerms of trade fall with ChinaJapan and Japan and NIEsNIEs Terms of trade improveTerms of trade improve

Prices of laborPrices of labor--intensive goods intensive goods

Prices of technologyPrices of technology--intensive goodsintensive goodsChinaChinas TOT =s TOT =

1111

The China Factor in JapanThe China Factor in Japans Deflations Deflation

S'S

D

S

DD'

Output

Output

Good deflation: Lower import prices

Bad deflation: Demand shift to Chinese products

Price level

Price level

1212

Overcoming JapanOvercoming Japans China s China SyndromeSyndrome

Protectionism incompatible with structural Protectionism incompatible with structural reformreformIndustrial Upgrading without hollowing outIndustrial Upgrading without hollowing outFocus on productivity, not competitiveness Focus on productivity, not competitiveness Rise of China and other Asian countries Rise of China and other Asian countries means a shrinking Northmeans a shrinking North--South gapSouth gapIt is in JapanIt is in Japans interest to be surrounded s interest to be surrounded by prosperous and peaceful nations rather by prosperous and peaceful nations rather than by poor and unstable onesthan by poor and unstable ones