Xu, a semiconductor engineer in Shanghai, should feel like a master of the universe in China’s new economy. He earns well in a sector critical to the nation’s future and lavished for decades with state subsidies. Yet for all the promise on his horizon, the 29-year-old is reluctant to splash his cash.
His income, in an environment of high youth unemployment, falling property values and a threadbare social security net, feels more precious by the day. An atmosphere of consumer “downgrading” and pessimism, he says, is everywhere. To Xu and millions like him, the world’s second-biggest economy increasingly resembles that of Japan during the long period of stagnation and deflation that followed the bursting of its property bubble in 1990.
The parallels are everywhere, from deteriorating demographics, persistent deflation and weak consumer spending to moribund stock and property markets. At around 300 per cent of GDP, according to calculations by Capital Economics, China’s total public and private debt is also closing in on Japanese levels. China’s leaders have studied Japan’s experience in detail, in an effort to avoid the policy mistakes that bedevilled Tokyo’s response to the slump.
But despite their efforts, signs of Japan-style malaise, such as reluctant consumers and deflationary pressures, are still proliferating in China. According to Goldman Sachs, an updated version of the Japanisation index — a gauge originally devised by the late economist Takatoshi Ito — shows that for the past five years, China has been consistently more “Japanised” than Japan itself. Looming over all of this is what economists describe as the iron law of demographics.
Japan’s population started to shrink in 2009; China’s decline began in 2022 and is on track to be steeper, worsening the country’s economic prospects. That outlook threatens President Xi Jinping’s reputation as a reliable steward of the economy, raising the prospect that the country will not surpass the US to become the world’s largest economy in the next one or two decades, as some once also believed Japan might. In another echo of Japan’s post 1990s-slump, the IMF warned last week of growing numbers of “zombie” companies across Asia, kept alive only by lenient banks.
This is now evident across China’s heavily subsidised manufacturing economy. Outside favoured sectors, companies are increasingly refusing to invest while households hoard cash instead of spending. Phrases coined in 1990s Japan, such as “job hunting ice age” and “price destruction”, are creeping into China’s vernacular.
Extract — continue reading at the source.
