As China grapples with substantial economic challenges, parallels are increasingly being drawn with Japan’s notorious lost decades. In a recent analysis, economists from Macquarie suggest that the obstacles facing the Chinese economy bear resemblance to Japan’s stagnant period starting in the early 1990s. The heart of this comparison lies in a persistently high savings rate coupled with ineffective consumption policies, which have inhibited growth in both nations. Despite Japan’s eventual, albeit slow, recovery marked by signs of economic activity, the question arises: is China at risk of facing a similar fate, or can it leverage its unique circumstances to forge a different path?
Japan’s economic malaise stemmed from overemphasis on investment and exporting, which eventually resulted in overcapacity and disinflation—a cycle that appears to be mirroring China’s situation today. Analysts note that as disinflation took hold in Japan, consumer and corporate spending diminished in anticipation of further price drops. This behavior sadly mirrors what is being observed in China, where trust in the economy is waning and a focus on savings over spending is becoming the norm. Macquarie proposes that unless China addresses its economic predicament decisively, it could find itself trapped in a similar cycle of stagnation.
China’s economic landscape is complicated by a closed capital account and a non-convertible currency, which ostensibly allows for a more flexible policy response compared to Japan’s past. However, Macquarie underscores that despite this unique positioning, the fundamental challenges remain unaddressed, and if allowed to fester, these may lead to deeper economic issues. Recently implemented monetary policy measures, such as a minor rate cut or reductions in the reserve requirement ratio (RRR), may prove insufficient in stimulating demand, suggesting that the real issue lies in the absence of significant consumer appetite.
Macquarie’s recommendations for turning the tide are ambitious yet essential. The suggestion for a substantial reduction in real estate risks through state-sponsored financial aid—estimated at around 5% of GDP—is bold but may be crucial for revitalizing confidence in the real estate sector. Additionally, shifting significant local and State-Owned Enterprises (SOE) debt to the central government could help local authorities regain a stable revenue stream, fostering sustainable economic growth. Furthermore, the idea of implementing a universal basic income, although considered radical by current standards, could drastically reshape the consumer landscape in China.
As Macquarie points out, timidity and procrastination define the current policy environment in China, echoing the experiences of Japan in the 1990s. To prevent a similar protracted descent into economic stagnation, it is imperative for Chinese authorities to consider more forceful and innovative measures. Time is of the essence—without decisive action, the window for reversing these negative trends is likely to close, leaving China to wrestle with its economic demons well into the future.