China faces a “lost decade” of sluggish economic growth much like Japan if it doesn’t reform its economy, according to an economist.
The assessment was made amid concerns about the world’s second-largest economy as it struggles to stage a convincing post-pandemic recovery.
“China could certainly have a lost decade of growth,” Rory Green, the chief China economist at GlobalData.TS Lombard, wrote in a note on Thursday.
Such a development would make China susceptible to so-called “Japanification” — a phenomenon that would mirror Japan’s “Lost Decade” of economic stagnation in the 1990s after the country’s asset and credit bubbles burst.
China now faces multiple challenges, including a property crisis, deflationary pressure, a demographic crisis, and trade tensions with the West.
Despite its troubles, Beijing appears to still have reservations about stimulating the debt-laden economy — even though it knows the risks of not stimulating it enough.
After all, “part of the current economic malaise is man-made as authorities attempt to deal with past excesses — namely, property and local government debt,” wrote Green.
Ideology clouds over Beijing’s economic choices
The country is currently facing an ideological problem rather than a lack of resources, which China does have, wrote Green.
“Since 2016, the policy reaction function has changed. Leaders are attempting to create a new political-economic model, one less reliant on debt-fueled property-led growth,” wrote Green.
In particular, Chinese leader Xi Jinping is in the camp that “China must undergo painful structural reform before authorities can stimulate or risk exacerbating existing structural imbalances.”
Meanwhile, technocrats in China generally believe China needs to reform and grow — or risk a Japan-style lost decade, Green added.
However, as China’s economy continues its sluggish momentum, Green thinks Xi will shift to a more pro-growth mindset due to concerns about welfare and social stability. Even so, it would take a while for China’s economy to get back on track.
“The old growth model is broken and a new one is emerging, albeit slowly,” Green wrote.
