I think the critical difference between Japan’s “extend and pretend” policies and China’s is the geopolitical element.
Japan feared domestic social and political disruption - and was heavily influenced by “free market” vested interests. There was also a degree of denial by MOF and METI that the gogo years of the post war period up to the mid 1980s were really over.
The CCP and the PRC however are driven by the deliberate aim of de industrialization of critical parts of the OECD supply chain. Loans and other support to the companies that will deliver this outcome are not going to stop for economic reasons.
Sadly policy makers in most of the countries suffering these effects are ideologically unwilling to enact anti-dumping and other defenses to respond. So zombification will not stop in China. Yes the population of the PRC will pay a price. But since when did the CCP care about that?
I think some of these are real differences, but perhaps not all of them.
"Japan feared domestic social and political disruption" <-- I actually don't think this is a big difference. China is worried about social and political disruption as well -- just look at how fast Xi ended Zero Covid after some small scattered protests. The old social compact in China was "growth in exchange for political quiescence". But with rapid growth now over, that social compact is gone, so the possibility for unrest is definitely there.
"The CCP and the PRC however are driven by the deliberate aim of de industrialization of critical parts of the OECD supply chain. Loans and other support to the companies that will deliver this outcome are not going to stop for economic reasons." <-- This is true, and I think this is an argument FOR zombification. Unproductive, unprofitable companies that fill supply chain gaps will continue to be supported with evergreened loans.
So the question becomes: What are the downsides of zombification from the regime's perspective? That's a topic I should have considered more. One answer is "social unrest" -- if slow growth makes the repressiveness of China's regime less tolerable, then we could see popular anger at the industrial-policy regime. Remember that Japan was a very free society, where people could pivot from the pursuit of money to the pursuit of lifestyle and art and leisure. That's not necessarily true in China.
Another possibility is that eventually China becomes more like the USSR. The USSR was famously unproductive, because it insisted on onshoring its entire supply chain. Right now, China looks hyper-competitive in a bunch of high-tech industries, but if zombies suck up more and more labor and other resources (including compute), that competitiveness could narrow over time.
Finally, there are fiscal dangers (https://rhg.com/research/chinas-financial-and-fiscal-decay/). When Europeans buy cheap Chinese EVs, part of the consumer surplus they receive comes out of the pockets of Chinese taxpayers and bondholders. Japan's zombification caused it to run up an enormous amount of debt, which it was able to carry safely only thanks to A) persistently low demand and low natural interest rates, and B) the government's ability to buy overseas assets that performed extremely well (https://www.ft.com/content/f7d3f20c-b303-4f6c-b4a0-8ee8906ae155). Now that the first of those has gone away, Japan's government debt IS becoming a problem, with a plunging exchange rate and creeping inflation.
So while China's government can get away with "damn the economics, full speed ahead" for a while, eventually I think something breaks...
It is not only zombie companies, even decently performing companies in China might have zombie assets. There is no culture of write-downs, no transparent bankruptcy proceedings, not only on the company level, but again the same thing for subsidiaries, business segments and individual assets.
I do not know enough about Japan to make the comparison here, but in China this clogs up the informational nerve-system of the economy. The wrong technology going bankrupt is necessary for the breakthrough technology to be recognized and to pave its explosive growth.
i agree that the PRC capacity to sustain its zombies is pretty substantial, but there will be limits. my guess is that the timing of any attack on Taiwan may reflect internal recognition that such limits are getting close
China fears domestic social and political disruption and if you are working on technologies that may be disruptive, you know you don't have a future in the country.
China is in denial that the gogo years are over. China had an excellent chance to pivot to high tech and a healthy ecology of start-ups and Xi murdered that. No entrepreneur is going to trust the old man ever again.
Xi - as METI before him - is influenced by his traditionalist view of what industry looks like. For some industries that is a good thing, for the county as a whole it is beginning to be bad.
A man obsessed with control of course wants to control supply chain bottlenecks. But there is only so much policy makers abroad can willfully ignore, we're reaching the point where even the most unwilling feel coerced to act.
I think Trump may have poisoned the well on some anti-dumping measures throughout the OECD but there's also the creeping realization that there has to be some kind of action. I'm not sure what a short-term equilibrium looks like, and my biggest fear is that even excluding the US under Trump any anti-dumping measures are going to be inflationary by default since even the optimistic story is going to require higher prices from manufacturers within the anti-dumping bloc to do facility modernization and buildout, which may also necessitate some level of demand destruction until more intra-bloc capacity arrives.
I think Trump may have poisoned the well on some anti-dumping measures throughout the OECD but there's also the creeping realization that there has to be some kind of action. I'm not sure what a short-term equilibrium looks like, and my biggest fear is that even excluding the US under Trump any anti-dumping measures are going to be inflationary by default since even the optimistic story is going to require higher prices from manufacturers within the anti-dumping bloc to do facility modernization and buildout, which may also necessitate some level of demand destruction until more intra-bloc capacity arrives.
I mostly agree with the thrust of your comments here and probably on the general direction of the solution. OTOH, I think saying China has a "deliberate aim of deindustrializing..." demonizes them more than the evidence supports.
Also assigning their competitive advantage to just dumping (or currency manipulation, or whatever) misses the essential point they've excelled in key manufacturing and technology areas versus the west and even if all the unfair stuff got neutralized, the worst-case fears of deindustrialization of key industries are still more likely than not.
Their advantage isn't just about unfair practices and it's a mistake to make policy based on that incorrect idea. IMO, it's better to be honest about what China has accomplished and set up policies that will counter their very real competitive advantages (say with EVs for example). The countries China's exports are affecting most need to be smart, deliberate, and careful to enact industrial policies to catch up or surpass China's advantages, not just depend on forever protectionism to maintain a status quo as an inferior competitor.
This article is very clear - and damning. One point should become more clear: China is also competing against every other country. By undercutting those counties, China is evicerating their future. By undercutting, say, the EU, it is going to put the EU out of business, depleting a generation of productive youth that won't have jobs. As Dionne Warwick sang, "And all the stars that never were are parking cars and pumping gas". I would think that tarrifs by the EU against China in this case would be a good idea, simply to protect their own capabilities. We all learned long ago that cheap ain't always good.
This point also raised a possibility for another useful article - or there may already be one: How big does a "country" have to be to be wealthy? And who gets to say that? Can the EU sell only within itself and be as rich as it is now? Can the US? What are the trade-offs if they aim to do so? I know those are black-and-white questions and that shades of grey are more the truth of the matter.
Thank you, Dr. Smith, for making the science of economics nowhere near dismal. More like "
“Depleting a generation of productive youth that won’t have jobs” is what happened in India and I expect it to happen in Europe too (tho India did tariff but did so against every country stupidly)
Great explanation. This post gives me hope for America. Noah, would you be willing to write something on the difference between Japan and China and relate it to the Plaza Accord? I think the Plaza Accord also had a strong yet indirect effect on Japan's lost decade. The Plaza Accord (forced on Japan, West Germany, et. al. by the U.S. as a military protector) caused the yen to increase in value. I think in reponse, Japan's central bank decreased interest rates to preserve dyanism in the tradeable sector and GDP growth, but what it did was cause a massive bubble to inflate very rapidly. When the central bank became alarmed and raised rates, that bubble popped. The zombification issue was made even worse and more extensive by the inflation of the economy from the response to the Plaza Accord. China won't have that issue. It will never agree to raise the value of its currency from pressure by the West. I'm not sure if that changes the eventual outcome for China and the zombie economy. Maybe it's just a difference of degree of collapse of growth? Noah, what do you think?
It seems to me that the best way to solve the zombie problem is to kill them one by one, starting with the most egregiously unprofitable and steadily moving up from there. This avoids dumping too many unemployed people into the labor market at once, limiting the potential for unrest, and also gives the banks more time to shore up their balance sheets as they acknowledge long-hidden losses. It also puts the less-bad zombies on notice that they need to become profitable sooner rather than later if they want to survive, motivating them to improve.
A very important topic which adds to the list of significant challenges facing China ... zombification, demographic decline, lack of control of critical supply chain (grains, energy), hostile neighborhood...
YouTube has loads of footage of abandoned Chinese malls, amusement parks, and resorts. Shame that the CCP has mismanaged the economy so bad. Chineses people should be enjoying their status as a developed country instead of slaveing away for fewer and fewer gains.
You could put hours of youtube clips together showing abandoned malls, amusement parks and resorts in the US too (and a much longer one showing abandoned factories.)
You could also put hours of youtube clips together showing thriving facitilies in both countries.
By support, do you mean they sell military equipment and other goods for a profit. I don't see how that compares with funding and participating in futile foreign wars.
No, as Noah has written in previous articles. The Chinese government subsidizes industrial production because it prefers a materialist economy to a service economy, as that makes the country more war ready. So Chinese citizens taxes and government debt go into bombs instead of retirement pensions. I wouldn't say their wars are futile though. Thanks to the CCPs help, the Myanmar junta has been able to bomb, torture, and kill enough pro-democracy citizens that Myanmar is a good little client state to China. Pretty good return on investment.
This is highly likely how things will pan out, and there's a critical caveat to add: Japan was already an incredibly wealthy, fully developed nation before it stumbled into its so-called "Lost Decades." If China falls into the exact same zombie trap today, the consequences will be vastly more severe. The parallels are striking—especially the bursting of the real estate bubble and the mounting piles of debt. But while the property crash looks nearly identical, the nature of the debt is different. In China, the real elephant in the room is local government debt. As the late Hong Kong economist Steven N. S. Cheung famously argued, the true engine of China’s rapid economic growth was the hyper-competitive local governments and city mayors actively bidding against each other for investment. It’s a pity he didn’t live to see this final chapter. The staggering debt accumulated through years of local infrastructure spending—which is 100% intertwined with the property market—is currently causing that very economic engine to seize up.
That said, China did face a somewhat similar crisis in the late 1990s. Back then, Premier Zhu Rongji, a leader who deeply understood Keynesian economics, managed a brutal, high-stakes overhaul. At a massive social cost, his administration shut down a vast horde of inefficient state-owned enterprises and essentially wiped the accumulated debt slate clean in a massive write-off. Obviously, that period remains highly controversial, and the China of today is entirely different from the China of thirty years ago. But the point is, China does possess a unique institutional advantage: the sheer, ruthless capacity to hit a total systemic reset, regardless of the price.
Whether the current leadership still has the stomach or the leverage to pull off that kind of reset remains to be seen. It's hard to call right now. We'll just have to wait and see.
If you're like me (and I know I am), you own stock in some "good" Chinese companies (BYD, etc.). How can we ever know just how much money they are really making or if we're gonna get fleeced?
It's probably too late for this comment to receive any significant traction, so I'll keep this brief. The idea that China has been conducting unproductive capital investments and that the time to pay the piper has finally come is one, just one, but an important part of the what Michael Pettis has been warning was going to happen to China for several years now. You can question the timing of his warnings and I know you don't see eye to eye with some of other points, but I think some props are due here. I remember having a conversation with about this, I think around 6 years or so ago? It left me wondering how one might be able to predict this ahead of time, of unproductive investments...
Side note, I'm pretty convinced by your arguments here, Noah, although I do hope for a more thorough "paper" study to back this up at some point...
It really seems like these East Asian economies have a major aversion to big companies failing and tossing large numbers of people into the unemployment line. I think in the USA we’re much more hard nosed about it, companies shed people right and left and both banks and shareholders are fine with them firing people they hired just recently. But I think that means overall we don’t have zombie companies as much so people work for companies that are making a profit and presumably raising the GDP. It would be interesting to have an economic analysis that takes cultural factors into account. I think our approach in the US gives us a relatively high GDP and a business environment that produces a lot of startups and innovation. But the downside is that people are pretty insecure in terms of job security and having companies that invest in their workers. And the advent of AI and continued competition with other labor markets I feel like workers and employers might want to learn something from Japan and China!
I'm happy to see that @jacklowenstein already made the use of "extend and pretend" as a synonym for evergreening because I was going to do that and then ask a policy question about how we, in the US, could design policies that would better mitigate the externalities brought about by these failures. I'm preferential to "gov't as insurance company" solutions, but am willing to consider punitive features as well.
As I understand it, the PRC has a '2040 Plan' whereby they will be self-sufficient in food in 14 years. To get there will require an immense amount of capital expenditure* and human involvement. Of note, it's also a move away from manufacturing solar panels, batteries, and EVs.
*Would we see buildings for PRC zombie companies and/or empty high-rise complexes being bulldozed for the sake of food security? Yes - because the PRC owns the land underneath and determines its best use.
Rolling over of NPL (in particular commercial loans) also tends to happen a lot in the U.S. I haven't seen a direct comparison made between Chinese and American Commercial Real Estate and NPLs…I think it would be interesting to see. I suspect a lot of the high vacancy rates in downtown American cities is a function of NPLs that haven't been recognized yet. If China has a zombie real estate problem, what does America's look like and how does it compare historically?
I think the critical difference between Japan’s “extend and pretend” policies and China’s is the geopolitical element.
Japan feared domestic social and political disruption - and was heavily influenced by “free market” vested interests. There was also a degree of denial by MOF and METI that the gogo years of the post war period up to the mid 1980s were really over.
The CCP and the PRC however are driven by the deliberate aim of de industrialization of critical parts of the OECD supply chain. Loans and other support to the companies that will deliver this outcome are not going to stop for economic reasons.
Sadly policy makers in most of the countries suffering these effects are ideologically unwilling to enact anti-dumping and other defenses to respond. So zombification will not stop in China. Yes the population of the PRC will pay a price. But since when did the CCP care about that?
I think some of these are real differences, but perhaps not all of them.
"Japan feared domestic social and political disruption" <-- I actually don't think this is a big difference. China is worried about social and political disruption as well -- just look at how fast Xi ended Zero Covid after some small scattered protests. The old social compact in China was "growth in exchange for political quiescence". But with rapid growth now over, that social compact is gone, so the possibility for unrest is definitely there.
"There was also a degree of denial by MOF and METI that the gogo years of the post war period up to the mid 1980s were really over." <-- I'm not sure this is different either. China has been overstating its growth since the bubble burst in 2021 (https://rhg.com/research/chinas-economy-rightsizing-2025-looking-ahead-to-2026/). This is often a tool the government uses to "smooth" growth between good and bad years (https://www.aeaweb.org/articles?id=10.1257/mac.20150074), suggesting that they think fast growth might come back.
"The CCP and the PRC however are driven by the deliberate aim of de industrialization of critical parts of the OECD supply chain. Loans and other support to the companies that will deliver this outcome are not going to stop for economic reasons." <-- This is true, and I think this is an argument FOR zombification. Unproductive, unprofitable companies that fill supply chain gaps will continue to be supported with evergreened loans.
So the question becomes: What are the downsides of zombification from the regime's perspective? That's a topic I should have considered more. One answer is "social unrest" -- if slow growth makes the repressiveness of China's regime less tolerable, then we could see popular anger at the industrial-policy regime. Remember that Japan was a very free society, where people could pivot from the pursuit of money to the pursuit of lifestyle and art and leisure. That's not necessarily true in China.
Another possibility is that eventually China becomes more like the USSR. The USSR was famously unproductive, because it insisted on onshoring its entire supply chain. Right now, China looks hyper-competitive in a bunch of high-tech industries, but if zombies suck up more and more labor and other resources (including compute), that competitiveness could narrow over time.
Finally, there are fiscal dangers (https://rhg.com/research/chinas-financial-and-fiscal-decay/). When Europeans buy cheap Chinese EVs, part of the consumer surplus they receive comes out of the pockets of Chinese taxpayers and bondholders. Japan's zombification caused it to run up an enormous amount of debt, which it was able to carry safely only thanks to A) persistently low demand and low natural interest rates, and B) the government's ability to buy overseas assets that performed extremely well (https://www.ft.com/content/f7d3f20c-b303-4f6c-b4a0-8ee8906ae155). Now that the first of those has gone away, Japan's government debt IS becoming a problem, with a plunging exchange rate and creeping inflation.
So while China's government can get away with "damn the economics, full speed ahead" for a while, eventually I think something breaks...
One thing that is still missing:
It is not only zombie companies, even decently performing companies in China might have zombie assets. There is no culture of write-downs, no transparent bankruptcy proceedings, not only on the company level, but again the same thing for subsidiaries, business segments and individual assets.
I do not know enough about Japan to make the comparison here, but in China this clogs up the informational nerve-system of the economy. The wrong technology going bankrupt is necessary for the breakthrough technology to be recognized and to pave its explosive growth.
Actually that *is* very much like Japan!
i agree that the PRC capacity to sustain its zombies is pretty substantial, but there will be limits. my guess is that the timing of any attack on Taiwan may reflect internal recognition that such limits are getting close
"When Europeans buy cheap Chinese EVs, part of the consumer surplus they receive comes out of the pockets of Chinese taxpayers and bondholders."
How close do you feel that current tariffs on Chinese EVs come to offsetting the taxpayer/bondholder subsidy?
My understanding is that the current EU tariff regime just about covers those particular subsidies.
Do you think that's incorrect?
I do not think there's a big difference.
China fears domestic social and political disruption and if you are working on technologies that may be disruptive, you know you don't have a future in the country.
China is in denial that the gogo years are over. China had an excellent chance to pivot to high tech and a healthy ecology of start-ups and Xi murdered that. No entrepreneur is going to trust the old man ever again.
Xi - as METI before him - is influenced by his traditionalist view of what industry looks like. For some industries that is a good thing, for the county as a whole it is beginning to be bad.
A man obsessed with control of course wants to control supply chain bottlenecks. But there is only so much policy makers abroad can willfully ignore, we're reaching the point where even the most unwilling feel coerced to act.
On the last point, I hope you are right. I will believe it when Europe restricts dumped Chinese EVs….
I think Trump may have poisoned the well on some anti-dumping measures throughout the OECD but there's also the creeping realization that there has to be some kind of action. I'm not sure what a short-term equilibrium looks like, and my biggest fear is that even excluding the US under Trump any anti-dumping measures are going to be inflationary by default since even the optimistic story is going to require higher prices from manufacturers within the anti-dumping bloc to do facility modernization and buildout, which may also necessitate some level of demand destruction until more intra-bloc capacity arrives.
I think Trump may have poisoned the well on some anti-dumping measures throughout the OECD but there's also the creeping realization that there has to be some kind of action. I'm not sure what a short-term equilibrium looks like, and my biggest fear is that even excluding the US under Trump any anti-dumping measures are going to be inflationary by default since even the optimistic story is going to require higher prices from manufacturers within the anti-dumping bloc to do facility modernization and buildout, which may also necessitate some level of demand destruction until more intra-bloc capacity arrives.
I mostly agree with the thrust of your comments here and probably on the general direction of the solution. OTOH, I think saying China has a "deliberate aim of deindustrializing..." demonizes them more than the evidence supports.
Also assigning their competitive advantage to just dumping (or currency manipulation, or whatever) misses the essential point they've excelled in key manufacturing and technology areas versus the west and even if all the unfair stuff got neutralized, the worst-case fears of deindustrialization of key industries are still more likely than not.
Their advantage isn't just about unfair practices and it's a mistake to make policy based on that incorrect idea. IMO, it's better to be honest about what China has accomplished and set up policies that will counter their very real competitive advantages (say with EVs for example). The countries China's exports are affecting most need to be smart, deliberate, and careful to enact industrial policies to catch up or surpass China's advantages, not just depend on forever protectionism to maintain a status quo as an inferior competitor.
This article is very clear - and damning. One point should become more clear: China is also competing against every other country. By undercutting those counties, China is evicerating their future. By undercutting, say, the EU, it is going to put the EU out of business, depleting a generation of productive youth that won't have jobs. As Dionne Warwick sang, "And all the stars that never were are parking cars and pumping gas". I would think that tarrifs by the EU against China in this case would be a good idea, simply to protect their own capabilities. We all learned long ago that cheap ain't always good.
This point also raised a possibility for another useful article - or there may already be one: How big does a "country" have to be to be wealthy? And who gets to say that? Can the EU sell only within itself and be as rich as it is now? Can the US? What are the trade-offs if they aim to do so? I know those are black-and-white questions and that shades of grey are more the truth of the matter.
Thank you, Dr. Smith, for making the science of economics nowhere near dismal. More like "
“Depleting a generation of productive youth that won’t have jobs” is what happened in India and I expect it to happen in Europe too (tho India did tariff but did so against every country stupidly)
What's up with loans to households collapsing so low? Families no longer buying housing?
Yep.
There must be a lot of tragedy in that graph, then.
Great explanation. This post gives me hope for America. Noah, would you be willing to write something on the difference between Japan and China and relate it to the Plaza Accord? I think the Plaza Accord also had a strong yet indirect effect on Japan's lost decade. The Plaza Accord (forced on Japan, West Germany, et. al. by the U.S. as a military protector) caused the yen to increase in value. I think in reponse, Japan's central bank decreased interest rates to preserve dyanism in the tradeable sector and GDP growth, but what it did was cause a massive bubble to inflate very rapidly. When the central bank became alarmed and raised rates, that bubble popped. The zombification issue was made even worse and more extensive by the inflation of the economy from the response to the Plaza Accord. China won't have that issue. It will never agree to raise the value of its currency from pressure by the West. I'm not sure if that changes the eventual outcome for China and the zombie economy. Maybe it's just a difference of degree of collapse of growth? Noah, what do you think?
Yep, I'll write about the Plaza Accord!
It seems to me that the best way to solve the zombie problem is to kill them one by one, starting with the most egregiously unprofitable and steadily moving up from there. This avoids dumping too many unemployed people into the labor market at once, limiting the potential for unrest, and also gives the banks more time to shore up their balance sheets as they acknowledge long-hidden losses. It also puts the less-bad zombies on notice that they need to become profitable sooner rather than later if they want to survive, motivating them to improve.
A very important topic which adds to the list of significant challenges facing China ... zombification, demographic decline, lack of control of critical supply chain (grains, energy), hostile neighborhood...
YouTube has loads of footage of abandoned Chinese malls, amusement parks, and resorts. Shame that the CCP has mismanaged the economy so bad. Chineses people should be enjoying their status as a developed country instead of slaveing away for fewer and fewer gains.
https://m.youtube.com/watch?v=TF_3En84hbc&t=2133s&pp=ygULdXJiZXggY2hpbmE%3D
You could put hours of youtube clips together showing abandoned malls, amusement parks and resorts in the US too (and a much longer one showing abandoned factories.)
You could also put hours of youtube clips together showing thriving facitilies in both countries.
Yes. And the Chinese don't have their people funding foreign wars with their labour.
Yeah they do, CCP is big supporter of Russia and the Myanmar junta
By support, do you mean they sell military equipment and other goods for a profit. I don't see how that compares with funding and participating in futile foreign wars.
No, as Noah has written in previous articles. The Chinese government subsidizes industrial production because it prefers a materialist economy to a service economy, as that makes the country more war ready. So Chinese citizens taxes and government debt go into bombs instead of retirement pensions. I wouldn't say their wars are futile though. Thanks to the CCPs help, the Myanmar junta has been able to bomb, torture, and kill enough pro-democracy citizens that Myanmar is a good little client state to China. Pretty good return on investment.
This is highly likely how things will pan out, and there's a critical caveat to add: Japan was already an incredibly wealthy, fully developed nation before it stumbled into its so-called "Lost Decades." If China falls into the exact same zombie trap today, the consequences will be vastly more severe. The parallels are striking—especially the bursting of the real estate bubble and the mounting piles of debt. But while the property crash looks nearly identical, the nature of the debt is different. In China, the real elephant in the room is local government debt. As the late Hong Kong economist Steven N. S. Cheung famously argued, the true engine of China’s rapid economic growth was the hyper-competitive local governments and city mayors actively bidding against each other for investment. It’s a pity he didn’t live to see this final chapter. The staggering debt accumulated through years of local infrastructure spending—which is 100% intertwined with the property market—is currently causing that very economic engine to seize up.
That said, China did face a somewhat similar crisis in the late 1990s. Back then, Premier Zhu Rongji, a leader who deeply understood Keynesian economics, managed a brutal, high-stakes overhaul. At a massive social cost, his administration shut down a vast horde of inefficient state-owned enterprises and essentially wiped the accumulated debt slate clean in a massive write-off. Obviously, that period remains highly controversial, and the China of today is entirely different from the China of thirty years ago. But the point is, China does possess a unique institutional advantage: the sheer, ruthless capacity to hit a total systemic reset, regardless of the price.
Whether the current leadership still has the stomach or the leverage to pull off that kind of reset remains to be seen. It's hard to call right now. We'll just have to wait and see.
If you're like me (and I know I am), you own stock in some "good" Chinese companies (BYD, etc.). How can we ever know just how much money they are really making or if we're gonna get fleeced?
You don't. China's official policy of financial non-transparency means only well-connected elites will have any real idea of specific equity value.
If the CCP--and Chaiman Xi--had a lick of sense, they'd invite Buffy over, and teach her Mandarin.
It's probably too late for this comment to receive any significant traction, so I'll keep this brief. The idea that China has been conducting unproductive capital investments and that the time to pay the piper has finally come is one, just one, but an important part of the what Michael Pettis has been warning was going to happen to China for several years now. You can question the timing of his warnings and I know you don't see eye to eye with some of other points, but I think some props are due here. I remember having a conversation with about this, I think around 6 years or so ago? It left me wondering how one might be able to predict this ahead of time, of unproductive investments...
Side note, I'm pretty convinced by your arguments here, Noah, although I do hope for a more thorough "paper" study to back this up at some point...
It really seems like these East Asian economies have a major aversion to big companies failing and tossing large numbers of people into the unemployment line. I think in the USA we’re much more hard nosed about it, companies shed people right and left and both banks and shareholders are fine with them firing people they hired just recently. But I think that means overall we don’t have zombie companies as much so people work for companies that are making a profit and presumably raising the GDP. It would be interesting to have an economic analysis that takes cultural factors into account. I think our approach in the US gives us a relatively high GDP and a business environment that produces a lot of startups and innovation. But the downside is that people are pretty insecure in terms of job security and having companies that invest in their workers. And the advent of AI and continued competition with other labor markets I feel like workers and employers might want to learn something from Japan and China!
I'm happy to see that @jacklowenstein already made the use of "extend and pretend" as a synonym for evergreening because I was going to do that and then ask a policy question about how we, in the US, could design policies that would better mitigate the externalities brought about by these failures. I'm preferential to "gov't as insurance company" solutions, but am willing to consider punitive features as well.
I'd like to follow Paul Krugman's example and suggest a musical coda for this blog post.
https://youtu.be/0N1_0SUGlDQ?si=RfInPFi970-NtesB
As I understand it, the PRC has a '2040 Plan' whereby they will be self-sufficient in food in 14 years. To get there will require an immense amount of capital expenditure* and human involvement. Of note, it's also a move away from manufacturing solar panels, batteries, and EVs.
*Would we see buildings for PRC zombie companies and/or empty high-rise complexes being bulldozed for the sake of food security? Yes - because the PRC owns the land underneath and determines its best use.
Also doesn't China eventually run out of money subsidizing all these companies to sell unprofitable stuff?
Rolling over of NPL (in particular commercial loans) also tends to happen a lot in the U.S. I haven't seen a direct comparison made between Chinese and American Commercial Real Estate and NPLs…I think it would be interesting to see. I suspect a lot of the high vacancy rates in downtown American cities is a function of NPLs that haven't been recognized yet. If China has a zombie real estate problem, what does America's look like and how does it compare historically?