Is China in danger of Japanification? What can Beijing’s policymakers do to avoid lost decades?
- Japan’s growth slowed significantly after its asset-price bubble burst at the end of 1989, with low inflation and interest rates largely driven by an ageing population
- Analysts have drawn parallels with China’s ongoing economic slowdown, which includes the deteriorating balance sheets of real estate companies
With China entering an era of slower growth, along with an ageing and shrinking workforce, weak consumer demand and a property market downturn, analysts are drawing strong parallels with Japan and raising the daunting prospect that the world’s second-largest economy could be heading for a similar so-called lost decades of stagnation.
Japan’s growth slowed significantly after its asset price bubble burst at the end of 1989, with companies and households burdened by debt preferring to pay off their liabilities rather than spend money on goods and services. Its working-aged population was also declining, but debt continued to balloon.
And in its “Fiscal Monitor” report in April, the International Monetary Fund estimated that Japan’s public debt to gross domestic product ratio would continue to rise and would hit 258.2 per cent in 2023 - the highest in all advanced economies.
China and Japan have pursued the same economic model – one that relies on high savings and high investment, with the governments also pushing for supply side measures that are designed to bolster exports.
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One of the key differences, however, is that China’s credit boom was largely extended to state-owned or controlled companies, including local governments, meaning they only stop borrowing if instructed.
Deteriorating finances, particularly in its poorest provinces, have raised the spectre of a looming local government debt crisis in China.
“[The comparison with Japan] offers an interesting but not necessarily complete template of what might happen to China during the next five to 10 years,” said George Magnus, a research associate at Oxford University’s China Centre.
The key lesson for China, analysts said, is not to repeat the same mistakes that Japanese policymakers made in the 90s.
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The Bank of Japan was slow to make interest rate cuts, while the government guided its stimulus towards investment, rather than consumption, and both stock and property bubbles bursting turned into decades of stagnation.
“And that’s a very bad sign macroeconomically. Individually they might be doing the right things, but collectively, they may be killing the economy,” Koo told Bloomberg earlier this month.
While China is nowhere near Japan’s lost decade in the 1990s, it is true that corporates and households are now less sensitive to interest rates
French investment bank Natixis analysed 3,000 listed Chinese companies between 2021 and March 2023 and found that capital expenditure growth has not recovered since collapsing in 2022.
“While China is nowhere near Japan’s lost decade in the 1990s, it is true that corporates and households are now less sensitive to interest rates,” the bank said earlier this month.
“Despite the lower borrowing costs, most Chinese corporates are deleveraging, keeping more cash and making less investments due to poorer return on capital and confidence.”
Chinese real estate developers have seen a sharp decline in leverage revenue and capital expenditure, and as real estate forms 32 per cent of privately-owned companies in China by assets, they cannot be easily replaced by other sectors in the short term, Natixis said.
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But Zhang Monan, deputy director of Institute of American and European Studies at the China Centre for International Economic Exchanges, said unlike Japan, there has not been a huge shock to Chinese asset prices.
However, the credit demand in the property sector and for households has taken a hit over the past few years, said Zhang, who has previously worked for China’s economic planner, the National Development and Reform Commission.
“China’s economy is in transition – the traditional industries are taking a back seat, although the new industries are growing rapidly, the growth rate has yet to match the old engines,” Zhang said.
“And China is still a developing country, there’s room for growth when it comes to consumption.”
Zhang added that various pension reforms, as well to China’s hukou household registration system, will boost consumption within rural migrant workers as access to public services is currently based on the birthplace of the holder rather than their place of work.
Proposals, such as the establishment of a unified domestic market to break down market barriers within different regions, would also make a significant difference to long term growth, she said.
“If there are no reforms … we are not sure what faces China’s economy in the future,” Zhang said.
“But I think the new administration are pushing for various reforms … a lot of people are asking, why hasn’t there been any large-scale stimulus? The focus [for policymakers] is on the medium to long term.”
People’s Bank of China adviser Liu Shijin said there is a sense of “confusion” in China over the new ways of generating growth as the tried and tested investment-led model is running out of steam.
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Once again, the country is a crossroads that requires experimentation, or “crossing a river by feeling the stones” – a phrase coined by China’s reformist leader Deng Xiaoping – according to Liu’s speech last month, published by the China Development Research Foundation under the State Council last week.
“Some people may ask, we have been doing this for more than 40 years, is this still necessary? The answer is yes, because different problems have to be solved in different periods,” Liu said.
“Issues such as achieving high-quality and sustainable economic and social development will still face a large amount of unknowns and uncertainties, and the answers cannot be found in sitting in an office in Beijing.”
But Magnus at Oxford University’s China Centre said without a shift of policymaking focus towards consumers and the services industry, it would be difficult to get economic growth back on track.
“The potential for growth as China gets richer is declining, when that happens you have to adapt your political institutions in order to change in which you can get smarter and more productive growth. That’s basically the lesson richer countries have had to learn over the last 50 to 6o years,” Mangus added.
“What really defines the economic problems for China now, and for the foreseeable future, is whether politically it has the capacity to accommodate the changes or reforms which have to be undertaken in order to shift economic performance.”
Analysts said that President Xi Jinping’s focus on making the state sector bigger and stronger may not be conducive to China’s long-term growth.
The only way to avoid a slowdown in the long run is to embrace significant structural change
And as it seems inevitable that China’s growth will be much slower at the end of the decade than previously anticipated, policymakers can still push back against the slowdown by channelling more credit into the economy, said Mark Williams, chief Asia economist at Capital Economics.
“But that would just be repeating the mistakes made in Japan and wouldn’t ultimately work – it would just create more debt to add on top of the problems of slower growth a few years down the line,” Williams said.
“The only way to avoid a slowdown in the long run is to embrace significant structural change, allowing market forces to play a greater role across the economy and for the state to step back. That’s not going to happen while Xi is leader.”
