WSJ "China's Economy May Be Worse Than Japan's 'Lost 30 Years'"

"High-Level Debt and Population Structure Issues"

There is an analysis suggesting that the Chinese economy could become worse than Japan's so-called "Lost 30 Years" (the period of prolonged stagnation in Japan after 1990). China is facing challenges such as high levels of debt, demographic structure, and external environment that Japan did not experience in the past.

On the 17th (local time), The Wall Street Journal (WSJ) mentioned the possibility of a long-term stagnation in China, reporting that current China and Japan 30 years ago share many similarities, including high levels of debt, aging population, and signs of deflation (a phenomenon where prices fall along with economic recession).

China has recorded high growth rates for a long time, but its real estate bubble is bursting. Despite government efforts to increase loans and spending, Chinese consumers are prepaying their mortgage loans.

This phenomenon is similar to Japan's experience after World War II, when it grew into an export powerhouse but suffered economic damage in the early 1990s as real estate and stock market bubbles burst. At that time, the Japanese government effectively lowered interest rates to near 0%. However, consumers and companies focused on repaying debt rather than borrowing for new spending and investment funds.

WSJ warned that China is facing problems that Japan did not have, suggesting the situation could be more serious than in Japan's past. Specifically, these include higher levels of debt, demographic structure, and geopolitical tensions compared to Japan at that time.

According to JP Morgan, China's total public debt, including local governments, was 95% of GDP last year, much higher than Japan's debt in 1991 (62% of GDP). China's population is also aging faster than Japan's. Japan's population began to decline about 20 years after the bubble burst, but China's population started to decline from last year.

The external environment is also worse than Japan's at that time. The United States and its allies are blocking China's access to advanced technology and reducing dependence on China in supply chains. As a result, foreign direct investment in China sharply declined last year.

Joanna Chua, Citigroup's chief Asia economist, pointed out, "So far, China's policy response could put the economy on the path of 'Japanification'." This criticizes the Chinese government for only implementing piecemeal measures, including gradual interest rate cuts, without deploying large-scale stimulus "cards."

On the other hand, some argue that the "crisis theory" is exaggerated, noting that China's asset bubble is not larger than Japan's in the past. Morgan Stanley analyzed that China's real estate value peaked at 260% of GDP in 2020, up from 170% in 2014, then slightly declined. China's stock market capitalization also peaked at 80% of GDP in 2021 and is currently around 67%.

Japan's land value reached 560% of GDP in 1990 and fell to 394% in 1994. The Tokyo Stock Exchange's market capitalization increased from 34% in 1982 to 142% in 1989. Recently, Bank of America (BoA) economists released a report stating that "concerns about China being trapped in a recession are excessive."