Zombies ate Japan in the 1980s/90s. Now Marching on China?

America’s global dominance is fading—and a rising superpower in the East is poised to take its place. Renowned for their formidable work ethic, savings habit, discipline and math skills, its workers are already putting Westerners out of jobs. It’s the world’s second-biggest economy, and the question isn’t whether it will oust the US from its perch, but when.

Nope—we’re not talking about China, but 1980s Japan.

Anxiety around China’s rise today is a déjà vu of how the world’s leading economies once felt around Japan. But that rise could become a replay of Japan’s subsequent decline and stagnation, says Patrick Chovanec of Silvercrest Asset Management, an expert on the Chinese economy

“There are striking similarities between China and Japan in the 1980s and ’90s, and they’re not superficial,” he says. “They’re two very different countries but they ended up with a banking system that basically produces the same result—the outcome being a rapid deceleration of (hitherto high) growth, as well as zombie banks and corporations.”

Chovanec is referring to what happens when, during economic slowdowns, banks or the government refuse to let unprofitable companies die, keeping them alive on a steady drip of new credit. Japan’s decade of the living dead began after its export-led boom abruptly ended, leaving the country hooked on credit before it had developed market mechanisms to keep that borrowing bonanza in check.

China too has gone on a credit-fueled investment bender as its export-led boom has faded. The prevailing assumptions about what happens next are that China will either suffer a US-style banking crisis that forces unprofitable corporations to the wall, or implement reforms that keep it growing at a healthy clip.

But it’s actually likely to suffer a fate more like Japan’s: a “zombie infection” in which large companies feed off credit while the economy stagnates. To understand why, though, it’s important to understand what China’s rise has in common with Japan’s—and how it’s already exhibiting the same symptoms.

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