The Chinese Century

Back to Contents of Issue: March 2002

Don't look now Japan, but your giant neighbor is gaining fast, says economist Kenneth Courtis.

by Patrick J. Killen

CHINA MAY WELL BECOME this decade's biggest economic success story, and while the Asian giant may not be able to overtake Japan, it will certainly close the gap.

That is the assessment of Kenneth S. Courtis, Goldman Sachs Asia's vice chairman, whose office is in Tokyo but who spends much of his time on the road, conferring with government and business leaders, particularly in Asia. "Unless you go to a city like Shanghai regularly, you can't see the explosive potential of China," he says.

Over a breakfast of fruit-laden yogurt and scrambled eggs, Courtis speaks of China's steady drive forward as a matter of historic proportions; of Japan's problems, which he says are more political, social and managerial than financial; and of how the U.S. economy may do better this year than international agencies and many other economists think.

"China is a very bright spot. Good year or bad year, China's leaders continue to move ahead on very complicated and difficult reform -- a supply-side reform," he says. "One of the next big steps is currently in progress: the privatization of the Bank of China [Starting with the former Hong Kong Banks -- editors]. In reform of the financial sector, it is releasing huge amounts of productivity in that economy, plus they have the right fiscal and the right monetary policy. "

Well, OK, but isn't China, with its 1.2 billion-plus population, still a long way behind Japan, with about one-tenth (125 million) of the people? Despite its decade of recessions, Japan is still the world's No. 2 economy.

"In 1980, China's economy was 5 percent of Japan's. Today it is about 25 percent," he says. "But if they can grow at 5, 6 or 7 percent annually over the next decade, and the Japanese government says it can grow at 1 to 1.5 percent, and let's say the yen goes to 160 [to the dollar], which I think is quite possible, my view is that 10 years from now, China's economy will be two-thirds the size of Japan's. A transformation of this magnitude is something that happens maybe once in every 300 or 400 years."

Courtis continues, "Economist Robert Mundell, in his 1999 Nobel laureate acceptance speech said, ÔI think any simpleton would have known in the first decade of the 20th century that the dominant economic factor of the century would be the rise of America.' At the risk of being a simpleton today, if China keeps on its current track of reform today, the dominant economic fact of this century is very likely to be the rise of China."

China's leadership has "embraced the future," he says, while "Japan's leadership in the last decade has turned its back to the future." But change is also overtaking Japan: "The biggest workout in history is now upon us" and it is this dynamic -- the rise of China and the shakeout in Japan -- "that is shaping the entire Asia Pacific region."

Courtis, 47, a Canadian who is part economist, part academic, forecasts big changes in China. "I now hear people say Ôwhen the revolution started in 1978,'" a reference to Deng Xiaoping's economic reforms started after the death of Mao Zedong. China, he feels, went through long periods of being defensive internationally, then feeling it was victimized, followed by a period of revolt against the international system.

In the last 20 years, China has tried to join the same system. "And now I believe in the next 20 to 30 years China will be moving to shape the international system. Now that it has entered the World Trade Organization and believes in free trade, I would see China playing an important role in leading emerging markets in the WTO in a positive way."

Turning to Japan, Courtis repeats an earlier statement that, "if Japan's crisis were only economic and financial it would have been solved a long time ago. It is fundamentally political, social and managerial," and reforms are held back by politicians, pressure groups and bureaucrats.

Courtis steers away from criticizing Prime Minister Junichiro Koizumi. "It doesn't seem that the prime minister is making huge amounts of headway, does it? (But) he is an incredible politician. I wouldn't underestimate him; he has incredible popular support, but the reality is that the vested interest in the status quo is still strong enough to block change."

At the same time, Courtis says, "If Japan was a company, I would buy it because there are such great assets. So much of the assets are being so badly used. People have such extraordinary discipline. Work ethic, lots of investment technology. Big population. Look at Nissan. Do you realize that Nissan will pay a dividend to the Renault group which I believe is larger than the annual earnings of Renault over the last 10 years?"

Asked what he would do if he were the Japanese prime minister, Courtis speaks of the need to take care of the banks' bad debts, estimated at JPY150 trillion and still growing. "The financial system is like the nervous system in the body. The banks are like the heart. You can't run the 100 meter dash if you have a weak heart."

"Here is what needs to be done," he says. "One, basically the government is going to have to nationalize or socialize the bad debt of the banks. Two, it has to force the banks to sell those assets underlying those bad debts so that you can get those assets back into the marketplace and put them back into productive use. Third, after that, you have to create growth, so one of the ways you create growth is through deregulation that allows new forms of demand to come onto the market. A good example of that is the cellphone business. In 1992-93, before deregulation, Japan had the lowest level of cellphone penetration in the (industrial) world. Today (after deregulation), it leads the global industry in use of cellphones." He says with the new generation of cellphones using 3G technology, Japan has a chance "to play a global role. And fourth, you need vast tax reforms. Taxes are very heavily skewed in favor of the (old) core constituency of the Liberal Democratic Party."

Courtis called Japan's construction industry "the growth industry of the 1990s," with approximately 550,000 companies employing 7 million people, or about 12 percent of the work force. "Put those people to work," he says, "not putting concrete for the third time under riverbeds, but in starting the vast renewal of Japan's urban space. Rebuild Tokyo, rebuild Osaka. Make them modern, attractive cities in which to live. Use land more efficiently through zoning and building code changes and deregulation."

Dubbing himself a minority of one, Courtis says he is more optimistic about the U.S. economy than the forecasts of the International Monetary Fund, the Organization for Economic Cooperation and Development and other economists. He predicts a growth rate of around 2.5 percent, compared to the 1.6-1.7 percent range of others. He gave these reasons:

1. Explosive expansion of liquidity

2. Short-term (interest) rates have come down 73 percent in the last 11 months, and that will have an effect later in the year.

3. The stronger dollar will allow the US to keep rates low for longer than most expect.

4. Energy prices in the $18-21 (per barrel of oil) range are very positive.

5. Inventories to GNP are at a record low just as the US enters the beginning of the normal three-year-inventory cycle. Inventories were down about $100 billion for 2001. If they go up only $50 billion for this year, that alone would generate almost 1.5 percent growth.

Concluding on an upbeat note, Courtis says that if he is right, increased exports to the US will help Japan, as well as the Asian Tigers: Taiwan, Hong Kong, Korea and Singapore. @

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