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Is China's Economy Facing Its Own 'Lost Decades'?

China's economy is decelerating after decades of rapid growth, saddled with deflation, low consumer confidence, and a yearslong property-market slump.
This has prompted many economists to draw parallels between the world's second-largest economy and the former holder of that title, Japan, just before it entered its "Lost Decades."
China's overleveraged real-estate sector, which accounted for about one-quarter of the country's GDP, was thrown into crisis with the 2021 default of mega developer Evergrande. It echoed the dramatic end of the boom years Japan experienced in the 1980s.
Speculation, fueled by easy credit policies, drove up real-estate values to unsustainable levels. When the Bank of Japan hiked interest rates to curb inflation, the asset bubble burst, the stock market crashed, and land prices entered free fall.
With property having been commonly used as collateral, this left banks with nonperforming loans and a capital shortfall, triggering a prolonged period of stagnation. for the Japanese economy.
Economists say the likelihood of China's "Japanification" largely hinges on Beijing's willingness to recognize the scale of the problem, act decisively, and win back private-sector confidence.
"The challenges of demographics and the property bubble are indeed comparable," Guonan Ma, senior fellow at the Asia Society Policy Institute, told Newsweek.
Yet China stands to have a better outcome thanks to several key differences—if Beijing adapts sound macroeconomic policies and manages to stabilize market confidence, he said.
"China's per-capita income is relatively low, compared to that during the Japanese bubble years, suggesting much more upside potential." The country is also benefiting from its more "solid" banking system and expansion in technology manufacturing, especially green tech, increasingly an economic driver, the senior fellow said.
Japan's Economic Ministry and China's Foreign Affairs Ministry did not immediately respond to written requests for comment.
Naoyuki Yoshino, a professor emeritus at Tokyo's Keio University and former Asian Development Bank Institute CEO, further stressed the key differences in the East Asian economies' banking sectors.
The Japanese government was caught without a plan to rescue troubled lenders. It then tasked public "bridge banks" to assume control of insolvent banks until a financial institution could absorb them.
Here, China is in a stronger position. With most of its banks being state-run, the government can inject capital directly into troubled banks, Yoshino said. This capability is strengthened by China's vast reserves, augmented by its trade surpluses.

Still, real-estate owners in China do face losses, Yoshino added, and this can be expected to weigh on consumer spending until the economy recovers.
With as much as 70 percent of household wealth tied up in real estate, the property market remains crucial to China's economic recovery.
Last week, the People's Bank of China pledged over $42 billion for local state-owned enterprises to purchase unsold apartments.
These abound in China. He Keng, former deputy head of the country's statistics bureau, told Reuters in September vacant homes are so numerous that the entire 1.4 billion-person population couldn't fill them all.
"The government still has room for maneuver, but will need to undertake significant market-oriented reforms, a liberalization of the financial sector, and more support for private enterprises," Eswar Prasad, Cornell University professor and a former International Monetary Fund official in charge of China, previously told Newsweek.
May 24, 2024 18:41
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