Can the Chinese economy avoid Japanese-style stagnation?


Shanxi Province’s GDP was one of the fastest growing in China in the first half of 2022, up 5.2% year-on-year. Pictured on January 14, 2022, a robotic arm welds the frame of a new energy vehicle in Shanxi.

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BEIJING — Several economists expect China to avoid Japanese-style stagnation — if the right policies take effect.

China’s gross domestic product barely rose in the second quarter as Covid lockdowns stifled growth. These restrictions have been relaxed. But Covid checks remain an uncertain overhang as the country waits for a quarterly gathering of policymakers expected at the end of the month.

But even if Covid restrictions ease, China still has untapped growth potential for the next few years, economists said.

For one thing, the country’s income levels – and theoretically spending – have plenty of room for improvement.

China’s GDP per capita in 2021 was less than a fifth of that of the United States, and the adjusted net national income per capita was about a seventh of that of the United States, according to World Bank data.

“Given the room to catch up is still there, China will still maintain 4% to 5% growth over the next five to 10 years,” said Larry Hu, chief China economist at Macquarie. He said uncertainties could affect his estimates, including whether China can shift from reliance on investment to consumption for growth.

Another potential area is China’s plan to unify business standards and access in the country, said Dan Wang, Shanghai-based chief economist at Hang Seng Bank China. “Once these barriers can be lifted…it can increase revenue significantly.”

She noted how current practice can favor a business from a local city over another province. A stark example of such regional biases occurred this year when different Covid rules between provinces created inefficiency, she pointed out.

Wang said foreign demand and increased manufacturing investment in China could support growth in coming years.

Much of the country’s official economic narrative has highlighted the “unexpected” impact of Covid and the “Russia-Ukraine conflict”, while pointing out that inflationary pressures are far higher in countries like the United States.

When asked if China would face Japanese-style economic stagnation, Bank of China chief researcher Zong Liang dismissed the possibility. He said China has, among other things, kept control of its currency, while the Japanese yen has fluctuated too quickly.

Zong also highlighted China’s investment and self-reliance in technological innovation. As for short-term economic growth, he expects recovery plan announced in May come into force in the third or fourth quarter, and some are benefiting from increased trade under new regional free trade agreements.

However, Zong said China faces similar challenges to Japan when it comes to the housing market.

Beijing has tried to suppress speculation in the market in recent years. But an underlying and more challenging issue for real estate is the aging population, an issue “that deserves our attention,” Zong said in Mandarin, according to a CNBC translation.

Consumption problem

Others, however, are less optimistic.

“China has an even more extreme version of Japanese imbalances,” making it harder to rely on consumption for growth, Peking University finance professor Michael Pettis said in an email.

The Japanese economy has stagnated, generally growing more slowly than the United States and China since the 1990s, following the bursting of a stock and housing bubble.

Japan grew rapidly in the 1970s and 1980s thanks to strong export growth and infrastructure investment, but by the early 1990s the country was increasingly investing in wasteful projects, Pettis said.

He said Japan has been unable to look to its consumers to drive growth, mainly because the manufacturing sector has been unable to accept the necessary transition to higher wages.

China will not necessarily go the way of Japan – if China can make substantial changes to its political institutions, Pettis wrote in April.

But he said the most likely scenario is that China does not enter a financial crisis or an acute economic crisis, and instead is “facing a very long period of weak Japanese-style growth”.

If unproductive investment – mainly in infrastructure and real estate – is reduced and not replaced by an equivalent source of growth, Pettis estimated that China’s GDP would grow no more than 2% or 3% per year. in the years to come.

covid drag

For this year, many investment banks have lowered their Chinese GDP forecasts to below 4% given the country’s zero Covid policy.

“Economists cannot solve this problem,” said Xu Hongcai, deputy director of the Economic Policy Commission of the China Political Science Association. That’s according to a CNBC translation of his Mandarin remarks.

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Xu took a pessimistic tone, noting that monetary policy and fiscal policy can contribute little, and increasing their magnitude would only aggravate longer-term problems.

Problems in China’s massive real estate sector also resurfaced this month, with many buyers are refusing to pay their mortgages until developers find the resources to complete apartment construction.

More state support?

Ultimately, however, China’s economy may have to look to its government for help.

After warning of the risks of excessive government support in his 2016 book “China’s Guaranteed Bubble”, author Zhu Ning said last month that the best solution to unemployment and housing bubble problems was increased state support.

“The situation in Japan may actually be a reason to justify a more planned approach to the economy,” said Zhu, professor of finance and vice dean at the Shanghai Graduate Institute of Finance. “[I] can’t think of a market-based approach.”

He said just as Japan built its social safety net during a bubble period, China should devote more resources to meeting three basic needs: housing, healthcare and education.

Relieving Chinese consumers of those costs could encourage them to spend, Zhu said.


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