It’s a small world after all. This week we discuss similarities/differences between China and Japan.
Many investors worry that China’s sluggish GDP (Gross Domestic Product) growth and weak inflation suggest it’s on the verge of Japan-style stagnation, with structural headwinds similar to what Japan faced in the 1990s.
Demographics are challenging and population declined last year. Additionally, China’s debt-to-GDP ratio of nearly 300% is close to Japan’s level in the 1990s. Besides that, China’s housing market is nearly saturated as 96% of urban households already own at least one house or apartment. However, there are important differences too. The risk of a Japan-like currency appreciation shock is quite low. Also, China hasn’t built up massive asset pricing surges like we saw in Japan, when commercial land prices rose 300% between 1985 and 1991. Chief Economist for Greater China and Head of Asia Economics Research Helen Qiao believes China can avoid ‘Japanification’ if policymakers take measures to reverse the growth downtrend. Simply unwinding existing restrictions can cap the downside in housing. On the other hand, falling into long term stagnation at China’s current income level would be an even drearier scenario than what Japan experienced.