The similarities between China today and Japan in the 1980s may look ominous. A lot of people think China's economy, like Japan's in the 1980s, is heading toward disaster.
But I disagree. China's growth, while not moving up in a straight line, may be just getting started. And its economy is more robust than you might think.
The Asian Miracle?
Like China today, by the end of the 1980s, Japan had the world's second-biggest economy, and it seemed inevitable that it would soon replace the U.S. as No. 1.
But 1990 was the high-water mark for Japan. A "lost decade" began in the early 1990s (that has now lasted much longer than just one decade).
From the mid-1950s to the mid-1970s, Japan's economy grew at about 10% a year. From 1973 through 1990 it averaged about 4% growth. Thanks to its stellar post-World War II economic growth, Japan was dubbed the "Asian Miracle."
But then, from 1990 to 2011, Japan's economic growth stagnated at less than 1% per year.
It's easy to assume, thanks to "status quo bias," that China's economy will continue growing steadily, because that's what it has been doing for the last two decades.
But many economists see disturbing similarities between Japan just before its lost decade(s), and China today.
Let's look at the similarities -- and significant differences -- between the two countries.
1. High Levels of Debt
From 1980 through 1990, Japan's debt rose from 105% to 176% of GDP, according to Bloomberg. Today in China, debt is about 280% of GDP, up from about 160% in 2008.
More debt means more resources are used to service the debt. Lots of debt also leaves an economy vulnerable to economic shock. We saw this happen in 1990 in Japan. The country's debt levels were too high, and its economy couldn't recover after the economic bubble burst.
2. Market Bubbles
Japan's Nikkei Stock index rose more than 500% in the 1980s. Then it crashed in 1990. And today it's still 52% below its December 1989 all-time high, as shown below.
Japan's property market peaked in 1991. And then it nosedived like the rest of the economy. Just before Japan's real estate collapse, land prices were estimated to be worth $18 trillion. This was quadruple the value of all U.S. land in 1991.
Although house prices rose 191% between 1973 and the beginning of 1991, they are still more than 40% lower than they were at their peak in 1991.
The beginning of the collapse of the stock market in 1990 and the real estate market in 1991 coincided with the beginning of Japan's "lost decade."
There are serious concerns that China's stock and real estate markets are poised to mirror Japan's market collapse.
Since December 1990, China's Shanghai Composite index is up 3,178%. In June 2015, however, the market peaked before crashing 32% in one month. It's still 37% lower than the 2015 peak.
Chinese house prices have soared 389% since the end of 1989. There are real concerns China's real estate market may be a giant bubble ready to pop. And this is one of the reasons for high levels of Chinese investor interest in foreign real estate.
3. Zombie Companies
When Japan's real estate and stock market bubble burst in the early 1990s, the country's banking sector was left with trillions of yen of worthless loans on its books. Rather than taking the losses, most banks -- with the encouragement of the government -- denied the problems existed and rolled the loans forward.
Companies that should have failed were kept alive, like zombies. During this period, the Japanese government directed financial resources towards bad loans. This turned struggling businesses into the walking dead and distorted competition. It also meant fewer resources could be allocated to the strongest firms that could have helped lead an economic recovery.
It took Japanese banks a decade to purge nonperforming loans from the system.
Some believe China is headed down the same path.
China's "rust belt," a line of interior cities from China's northeast to the southwest, is home to many half-dead cement factories and other semi-mothballed heavy-industry plants. Many of these companies grew during Chinese investment boom, fed by credit from state-owned banks.
There is now a surplus of product from these factories. Many of them defaulted on their loans. Like Japan 25 years ago, Chinese officials feel pressure to keep the zombies alive.
If the Chinese government stops propping up these failing businesses, they will go bankrupt. Closed factories mean millions of unemployed workers. This would increase state expenditure on welfare and raise the prospect of social unrest
4. Aging Populations
The working age population in Japan has shrunk from about 87 million in 1995 to about 75 million today, according to Bloomberg. Meanwhile, the number of people aged 65 or higher in Japan has grown from about 15 million in 1990 to nearly 35 million today.
Japan's population also fell by 0.7% between 2010 and 2015.
Older and fewer workers mean more welfare, less investment and lower consumption. This leads to slow economic growth. And Japan's economy has been stagnant for more than two decades.
China seems to be taking a similar course. The number of workers supporting retirees is shrinking. Currently, the country has about five workers for every retiree. By 2040, this ratio will have collapsed to about 1.6 to 1.
Chinese are also getting older. By 2050, the average age in China is expected to be 46. That number was less than 30 at the beginning of this century. This change would position China as one of the oldest populations in the world.
At the same time, the number of Chinese aged 65 or higher is expected to rise from roughly 100 million in 2005 to more than 329 million in 2050. That's more senior citizens than the total, combined populations of Germany, Japan, France and Britain.
Like Japan, changing Chinese demographics pose a challenge to future economic growth.
What Makes China Different?
Despite the many apparent similarities between Japan in 1990 and China today, there are major differences in China's favor.
1. China Is at a Different Stage of Development
Even before WWII, Japan was already an advanced economy. It had high labor productivity and mature institutions. After much of this was destroyed in the war, it was rebuilt. Rebuilding is much faster and easier than starting from scratch. By 1990 Japan was nearly as rich as America. Its GDP per capita was about 80% of the U.S.'s.
China is at a very different stage of development. It's in the middle of transforming from an agrarian society to a modern, urban one. It's at a much earlier stage of development than Japan was in 1990. Today, China has a GDP per capita of just over $7,900. That's only 14% of the current U.S. figure of $55,800. China still has a lot of economic growth ahead.
2. China's Booming Middle Class
China's urban population is set to grow from 54% in 2014 to 70% by 2025. That would put China's urban population in line with other developed countries.
One result of this rapid urbanization is a quickly growing middle class of consumers. This growing middle class, earning higher incomes and spending more money on goods and services in China, will transform China's economy -- and it already is transforming it.
In a planned economy, there's always room for mistakes. Japan pulled the wrong economic levers in the 1990s. Nothing is stopping China, now the world's second-biggest economy, from doing the same.
But even at a slower pace, the Chinese economy will continue to grow. A Chinese "lost decade" is highly unlikely.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.