On top of that, we should recognize that China still has plenty of room for further productivity growth – which, as we've seen, was not at all the experience of Japan. China's productivity growth – which has been an important economic driving force for the past 30 years – is primarily a result of two large structural transformations, and not innovation and technological adoption.
Indeed, developing countries like China have grossly misallocated resources, and simply reducing the distortions and moving capital and labour from low-productivity areas to high-productivity ones could result in significant productivity gains. China has already managed to do something similar when it moved workers from the low-productivity agriculture sectors and state-owned companies into higher productivity manufacturing sectors and private firms. The efficiency gains were tremendous. If it were to continue to do the same – and also focus on reallocating capital and investment – this could bring about significant productivity gains.
In other words, China is still far from its own efficiency frontier – not to mention the world's productivity frontier.
A demographic time-bomb?
As well as drawing comparisons between the two countries in terms of economic fundamentals, some have pointed to their demographic similarities.
It's true that both China and Japan have an ageing population. But the nature of that ageing is very different – in China, it is a man-made phenomenon, thanks to the one-child policy. The stage of each country's demographic transition is also vastly different. It won't be until 2050 before the over-65s will make up a quarter of China's population.
More importantly, though, while China's labor force will shrink due to demographics, labor productivity is still growing at a rapid pace. Its human capital accumulation is rapidly accelerating, and converging to advanced economies. In the end, it is efficiency units of labor that matters, rather than total labor force.
Inflation, deflation and exchange rates
Currently, China is facing depreciation pressures, which set off a near-panic and led to many investors taking capital out of the country. While the world is concerned about a sharp depreciation of the RMB, we are reminded of the consequences of the Plaza Acord in 1985, when the Japanese yen appreciated by 40% following a concerted effort on behalf of major industrial countries to depreciate the dollar. The consequence was two distinct periods of recession in the 1980s and early 1990s. In this sense, an appreciation-triggered crisis and its prolonged aftermath in the case of Japan will be unlikely to take place in China, at least in the near term.