Macroscope | China isn’t about to have a Japan-style lost decade
‘Policy pragmatism and willingness to embrace structural changes are, in our view, the fundamental differences between China today and Japan in the early 1990s’
In the previous instalment of our China end-game series, we outlined three possible paths for China to unwind its structural imbalances and that a financial crisis, akin to the US’s 2008 experience, is unlikely to happen due to China’s impeccable state control of its macro system. The latter has enabled China to kick the can down the road further than most countries when it comes to dealing with structural impediments.
However, merely suppressing the imbalances without ever resolving them cannot be a sustainable strategy. Without a crisis that cleanses the system, China may eventually have to pay a higher price.
To see what could be the cost for delaying the adjustment, we think Japan’s experience may contain some valuable insights.
Similar to China in recent years, Japan had witnessed significant asset price appreciation in the late 1980s, fuelled by easy monetary policy. The Plaza Accord, signed in 1985, ignited the strength in the Japanese yen, which eroded its export competitiveness. The working-age population peaked in 1992 and led to declining potential growth thereafter. Limited market clearance of zombie companies was a hallmark of Japan’s subsequent lost decades. The fiscal rescue, which failed to revive growth, had contaminated the official balance sheet, making Japan the most indebted government ever since.
There are eerie parallels between China and Japan, and the experience of lost decades warns that the cost for China’s can-kicking strategy could well be a collapse of its economic growth that eventually sinks the economy into a prolonged stagnation.
