Japan exported capital, China exported industrial power. That distinction may ultimately define the different trajectories of the two great Asian economic models of the modern era.
For decades, the world admired Japan as the model creditor nation. Its companies conquered global markets in automobiles, electronics and machinery. Its households saved diligently. Its trade surpluses accumulated immense national wealth. By the late 1980s, Japan appeared economically unstoppable.
But history evolved differently.
Creditor nation paradox
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After the collapse of its asset bubble, Japan increasingly recycled its national savings inwards — financing government debt, stabilising domestic demand and preserving social cohesion. Its banks, insurers and pension funds became among the largest holders of Japanese government bonds. Interest rates collapsed towards zero. Financial repression became structural.
There was logic to this evolution.
Japan faced an ageing population, weak consumption growth, persistent deflationary pressures and a traumatised post-bubble private sector. Under such conditions, the state inevitably became the borrower of last resort. Without persistent fiscal support, Japan may well have suffered far deeper economic and social instability.
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In many ways, Japan’s system was rational. It prioritised resilience, order and wealth preservation.
And Japan never ceased being an advanced industrial power. It retained leadership across precision machinery, robotics, semiconductor equipment, specialty materials and automobile engineering. Japanese firms also successfully internationalised production networks across Asia and continued generating enormous overseas income streams.
The issue was not industrial collapse. It was strategic orientation.
Japan increasingly optimised for preservation rather than renewed industrial expansion. Given its demographics and social priorities, this may well have been the rational choice. Japan matured into perhaps the world’s most stable advanced society — wealthy, orderly and technologically sophisticated.
But that choice also carries long-term strategic consequences.
Financing your competitors
Japan’s enormous savings did not simply finance its own public debt. It became one of the world’s largest external creditors, with vast holdings of US Treasuries and overseas financial assets, in search of higher returns. For decades, Japanese capital helped finance both American deficits and global asset markets.
For more stories about where money flows, click here for Capital Section
And therein lies the deeper contradiction of the creditor model.
Using hard-earned national savings to finance the deficits, consumption and capital markets of competing economies is difficult to describe as a coherent long-term industrial strategy — even if Western economists and journalists call it liberal capitalism. Japan strengthened the financial architecture of the very system competing against its own industries.
Then came the geopolitical realities of power.
When Japan’s industrial rise increasingly threatened American competitiveness, the 1985 Plaza Accord forced a sharp appreciation of the yen against the US dollar. Japanese exports became less competitive. Industrial momentum weakened. Manufacturing increasingly shifted abroad. Asset bubbles intensified domestically as liquidity surged inwards.
To be clear, the Plaza Accord alone did not “destroy” Japan. Japan’s later stagnation also reflected the collapse of its property bubble, banking crisis, demographic ageing, corporate conservatism and policy inertia. But the episode exposed an important vulnerability of the financial creditor system: even wealthy financial powers remain constrained within a geopolitical order ultimately shaped by larger military, monetary and strategic forces.
History offers repeated examples that creditor status alone does not guarantee enduring strategic power. The Dutch Republic helped finance Britain’s rise in the 18th century, only for Britain eventually to eclipse Dutch commercial and naval supremacy. In the 19th century, British capital financed vast parts of America’s industrial expansion — railways, infrastructure and manufacturing — before the US ultimately surpassed Britain economically, financially and geopolitically.
In both cases, the creditor nation accumulated financial wealth, while the borrower compounded productive capability and strategic scale.
Financial claims, after all, are only as secure as the political and geopolitical order enforcing them. Sovereign debt is not merely finance. Creditors may hold contractual claims, but the larger powers often shape the terms of repayment, monetary adjustment and global financial architecture itself.
History therefore suggests a deeper lesson: Lenders without sufficient strategic leverage frequently end up subsidising the rise of stronger competitors. Financing wealth alone rarely guarantees long-term national influence if industrial capability, technological leadership and geopolitical power increasingly reside elsewhere.
At the same time, large parts of Japanese outward investment during the bubble era proved strategically diffuse:
• Golf courses;
• Trophy real estate;
• Prestige acquisitions;
• Financial assets;
• Speculative property.
Capital abundance did not always translate into renewed national capacity.
China’s alternative model
China’s rise becomes easier to understand when viewed through the framework established earlier: systems ultimately evolve around what they reward.
Japan’s post-bubble system increasingly rewarded stability, preservation and financial resilience. China’s system rewarded industrial expansion, scale, export competitiveness and manufacturing dominance.
China therefore chose a very different path. It did not merely accumulate savings but aggressively directed them towards building productive capacity. Its political economy became organised around scaling industrial power at extraordinary speed. Chinese savings were channelled into:
• Factories;
• Ports;
• Railways;
• Industrial clusters;
• Engineering ecosystem;
• Strategic minerals;
• Energy systems;
• Export infrastructure;
• Semiconductor supply chains; and
• Manufacturing ecosystems.
Even when investments were excessive, duplicated or inefficient, they often still expanded industrial competence. This is the distinction many economists underestimated for years.
China was not merely building wealth; it was building capability.
Capability compounds differently
And capability compounds differently from financial wealth. A duplicated apartment block may create excess supply. A duplicated semiconductor ecosystem can create engineering depth. Multiple electric vehicle (EV) manufacturers may destroy margins domestically, but they also deepen supplier ecosystem, manufacturing knowledge and global competitiveness.
This partly explains why China today dominates simultaneously across so many industrial sectors:
• EVs;
• Batteries;
• Solar;
• Shipbuilding;
• Consumer appliances;
• Drones;
• Industrial machinery; and
• Telecommunications equipment.
China today accounts for more than half of global EV production, dominates global solar manufacturing, controls sizeable portions of battery supply chains and has become the world’s largest commercial shipbuilder.
These are not isolated corporate successes. They reflect ecosystem-level industrial depth. But manufacturing scale and industrial breadth are not identical to technological frontier leadership.
The US still dominates many of the highest value layers of the global economy:
• Advanced software;
• Artificial intelligence (AI) models;
• Cloud infrastructure;
• Aerospace;
• Semiconductor design;
• Biotechnology;
• Venture capital;
• Frontier scientific research.
America did not abandon productive capability. It increasingly shifted towards higher-value, asset-light and innovation-intensive capability.
China dominates much of the manufacturing ecosystem. America still dominates large parts of the innovation frontier.
That distinction matters enormously.
Not pure central planning
But this is where many Western interpretations of China also become too simplistic. China’s rise was not purely centrally planned. No state, however powerful, can micromanage an industrial ecosystem of such scale and complexity across virtually every sector simultaneously.
In fact, many of China’s inefficiencies themselves reveal the limits of central planning:
• Overcapacity;
• Price wars;
• Capital wastage;
• Local government debt;
• Redundant industrial projects;
• Brutal competitive duplication.
What China achieved was something more hybrid and more powerful: state-enabled infrastructure combined with intensely competitive private-sector incentives.
This was precisely the thesis in “The political economy of modern capitalism”: Economic outcomes are rarely determined purely by ideology alone. What matters is whether the system creates incentives for relentless competition, technological upgrading, productive reinvestment and continuous scaling.
The Chinese state created financing, infrastructure, logistics and strategic direction. But it was still largely private firms competing ferociously against one another for scale, exports, market share and survival. That competitive intensity matters enormously. It explains why Chinese firms often operate at brutally low margins domestically. Competition inside China is relentless precisely because the system rewards scaling, industrial expansion and export dominance.
The real divide in modern capitalism may therefore no longer be between capitalism and socialism, or state and private ownership — but between systems that compound productive capability and systems that primarily preserve accumulated wealth.
Global balance sheet
The distinction becomes even clearer when viewed through the global balance sheet (see table).
The US remains the world’s largest net debtor nation by far — the largest beneficiary of foreign savings and investments. In contrast, Germany, China and Japan sit among the world’s largest net external creditors. Their domestic savings are not merely consumed internally, but recycled outward through overseas investments, reserve accumulation and strategic financing. America’s model, meanwhile, absorbs global capital to sustain consumption, financial markets and asset valuations.
But the way those surplus savings are recycled differs enormously. Japan largely recycled savings into preserving financial wealth and external financial assets. China recycled far larger portions of national savings into domestic industrial ecosystems before exporting surplus capital abroad.
China also financed America through massive US dollar reserve holdings. But unlike Japan’s largely passive creditor role, China simultaneously used domestic savings to expand factories, logistics networks, supply chains and industrial ecosystems at extraordinary scale.
That is fundamentally different use of national capital.
Why Chinese firms must expand abroad
As argued earlier in “The political economy of modern capitalism”, the logic of China’s system almost inevitably pushes firms towards external expansion. Relentless domestic competition compresses margins. Low profitability weakens valuations. Weak valuations increase the future cost of capital. Firms therefore need larger external markets to sustain profitability, improve valuation multiples and secure financing for future technological upgrading and industrial expansion. In that sense, Chinese outward expansion is not merely geopolitical ambition. It is structurally embedded within the incentives of the system itself.
This is why initiatives such as:
• Overseas factory expansion;
• Global logistics infrastructure;
• Cross-border acquisitions;
• International EV exports;
• Industrial parks abroad; and
• Belt and Road Initiative
are not accidental. They are extensions of China’s industrial model.
Not all such projects succeed commercially. Many have generated geopolitical backlash, debt sustainability concerns and questionable financial returns. But strategically, they reflect a system attempting to extend industrial ecosystems beyond its domestic borders.
Reserves as defence — and expansion
China’s foreign exchange reserves also reflect this dual logic.
Yes, China holds massive US dollar reserves that directly finance America. But unlike Japan’s largely passive creditor role, China increasingly uses its foreign earnings strategically — both defensively and offensively.
The memory of the Asian financial crisis remains deeply embedded across Asia. Many policymakers concluded that countries without large foreign reserves remain vulnerable to speculative attacks, external funding shocks and dependence on Western-led financial institutions.
China learnt that lesson early. Its reserves therefore became instruments of sovereignty and resilience.
But increasingly, they also became tools of industrial expansion. This also helps explain why the Chinese state treats corruption, illicit capital flight and the large-scale remittance of wealth abroad so seriously. From Beijing’s perspective, national savings generated from decades of trade surpluses are not merely private wealth but strategic national assets.
Savings are viewed as fuel for:
• Industrial expansion;
• Technological upgrading;
• Infrastructure;
• Supply-chain control;
• Energy security; and
• Long-term national competitiveness.
Large-scale corruption or uncontrolled capital outflows are therefore not seen purely as financial crime. They are viewed as leakages from the national development system itself — weakening the state’s ability to compound productive capability domestically.
Investor trade-off
None of this means China’s system is without serious risks — far from it. Its model has also produced:
• Industrial overcapacity;
• Property bubbles;
• Excessive debt;
• Falling returns on capital;
• Weak household consumption; and
• Geopolitical backlash.
Nor does China necessarily reward equity investors particularly well. In fact, one of the defining paradoxes of modern China is this: China may succeed industrially while disappointing shareholders financially. Chinese firms often sacrifice margins, profitability and shareholder returns in pursuit of scale, market share and strategic positioning.
American companies, by contrast, frequently generate:
• Higher margins;
• Higher valuations;
• Stronger shareholder returns;
• More efficient capital markets.
That partly explains why US equities have vastly outperformed Chinese equities over the past two decades (see chart).
America’s system remains extraordinarily
powerful financially because it combines:
• Deep capital markets;
• Global reserve currency advantages;
• Institutional trust;
• Venture capital depth;
• Asset-light scaleability; and
• Global investor confidence.
American technology firms generated extraordinary shareholder wealth precisely because the system rewarded profitability, capital efficiency and scaleable returns on equity.
China’s system rewarded something different: scale, capability and manufacturing depth.
But this raises the unresolved question at the heart of China’s model:
At what point does capability without sufficient returns begin weakening the very capital base needed to sustain future innovation?
Industrial depth can create strategic power. But if returns on capital remain persistently weak, the mechanism required to finance future technological upgrading may eventually weaken itself.
Yet the opposite risk also exists. A shareholder-
maximising system can gradually weaken industrial depth when financial engineering, asset inflation and short-term returns become more attractive than rebuilding productive capacity.
The deeper lesson of modern capitalism
The deeper irony is that both systems may eventually converge towards each other’s weaknesses.
China increasingly needs stronger household consumption, better capital discipline, higher returns on investment and more efficient allocation of savings. The US and parts of the West, meanwhile, increasingly recognise that financial strength alone cannot substitute for industrial resilience, manufacturing depth, supply-chain security and strategic productive capability.
Japan optimised for social stability, preservation and financial resilience. China optimised for industrial scale, productive capability and strategic competitiveness.
Japan’s savings helped finance America’s rise. China increasingly wants its savings to finance China’s own future.
Both systems emerged from rational responses to different political, demographic and economic realities. Neither was the result of some perfectly coherent master plan. Economic systems evolve through incentives, institutions, competition, policy responses and unintended consequences over time. And both ultimately reflect the deeper argument made earlier: Economic systems become expressions of what they incentivise, reward and compound.
The nations that merely preserve wealth may remain rich. But the nations that keep compounding capability are the ones that eventually change the terms of the world.
Portfolio commentary
The Malaysian Portfolio fell 0.5% for the week ended June 3, faring better than the benchmark FBM KLCI, which fell 1.5%. The two winners were Hong Leong Industries (+0.8%) and Kim Loong Resources (+0.8%). On the other hand, Maybank (-4.8%), Public Bank (-1.3%), United Plantations (-0.3%) as well as LPI Capital (-0.1%) ended in the red. Total portfolio returns now stand at 215% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 8.6% over the same period, by a long, long way.
Meanwhile, the Absolute Returns Portfolio was down 0.6% for the week. Last week’s loss reduced total portfolio returns to 31.4% since inception. The two gaining stocks were Schneider Electric (+5.1%) and Alibaba Group Holding (+1.8%) while the biggest losers include Sun Hung Kai Properties (-6%) and newly acquired Nvidia Corp (-3.4%) and Microsoft Corp (-2.7%).
The AI Portfolio, on the other hand, gained 10.8% last week. This boosted total portfolio returns to 41.1% since inception. The top gainers were Unusual Machines (+53.3%), Hewlett Packard Enterprise (+48.3%) and Datadog (+12.9%) while the notable losers were Amazon.com, Inc (-8%), Naura Technology Group Co Ltd (-6.1%) and Marvell Technology, Inc (-5.7%).
We have previously articulated our rationale for selling off most of the Chinese stocks in our global portfolios and reinvesting the proceeds in US stocks. We will elaborate on these new acquisitions in an upcoming article.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports
