China’s looming economic stagnation echoes Japan’s lost decade
Economists cited by the American weekly Newsweek assess that the Chinese economy may enter a period of prolonged stagnation. In their opinion, China's collapse in the real estate market and demographic problems resemble the situation Japan found itself in after the bursting of the speculative bubble.
As Newsweek claims in its analysis, China is facing an increasing crisis, largely caused by the crisis in the real estate market. At its peak, the indebted real estate sector accounted for about one-quarter of China's GDP. According to analysts, these events recall the dramatic end of the economic boom in Japan in the 1980s.
Will China use its reserves to save the economy?
"The challenges of demographics and the property bubble are indeed comparable," said Guonan Ma, a senior fellow at the Asia Society Policy Institute, in an interview with Newsweek. However, the economist noted that China could avoid the Japanese scenario if the authorities in Beijing implemented appropriate macroeconomic policies and managed to restore market confidence.
The weekly also quotes Naoyuki Yoshino, former director of the Asian Development Bank Institute. Yoshino points out significant differences between the Japanese and Chinese banking sectors. While Tokyo's government had no plan to save troubled banks, Beijing could directly recapitalize state financial institutions. These capabilities are further strengthened by China's significant reserves, thanks to foreign trade surpluses.
Newsweek also quotes Eswar Prasad, a professor at Cornell University and former official of the International Monetary Fund for China. Prasad emphasizes that the government in Beijing still has room to maneuver, but it must carry out significant market reforms, liberalize the financial sector, and increase support for private enterprises.
Beijing allocates $57 billion to buy back homes
Regardless of the prospects for economic recovery, the collapse in real estate prices is already hitting Chinese consumers. With about 70% of household wealth invested in real estate, this market's decline could weigh on consumer spending for a long time. Therefore, stabilizing the real estate sector remains vital to restoring high growth rates in China's economy.
Last week, the Central Bank of China pledged to allocate over $57 billion to state-owned companies to buy back unsold homes. These are a plague in many Chinese cities - He Keng, a former deputy head of the local statistics office, estimated in September that the number of vacant homes exceeds the demand of China's 1.4 billion population.
Is China plunged into crisis?
The problems in the Chinese real estate market have complex causes. One of the main factors was a long-term policy of cheap money and expansive lending, which fueled the speculative boom. Permitting developers to incur excessive debt led to a price bubble, detaching real estate valuations from economic fundamentals.
The economic downturn also exposed weaknesses in China's development model, heavily relying on infrastructure and construction investments. With unfavourable demographic trends and growing wealth disparities, it is time for deep structural reforms to make the Chinese growth model more sustainable and based on domestic consumption. These adjustments are painful, hence the concerns about the medium-term prospects of the world's second-largest economy.
