China, the land of dragons,
Rising above the skies,
The mandate from heaven,
Rests on the laps of,
A young communist dynasty,
But can it be reborn, a phoenix,
Or head towards the ashes.

The economic harbingers of doom come for China. “China is heading towards a lost decade like Japan”, “The downfall of China”, “Population collapse”, “Chinese youths are disillusioned”.

These are the conversations dominating headlines in international media and have even crept into the tightly controlled local Chinese news. China is in a rough spot and is akin to grinding against sandpaper as investors are increasingly shunning its stock markets.

So is it true then that China is entering a lost decade like Japan did in the 1990s? The answer is more perplexing than the question itself in my opinion. Both countries’ historical contexts are vastly different and it is infinitely hard to compare apple to apple (well, more like siu long bao to gyoza. Both are dumplings but the way they make them are so different, ok, I shall stop with this horrible example).

Japan’s Lost Decade was triggered by the Bank of Japan

There is a famous fact that is used by every news outlet to describe Japan’s crazy property and stock markets in the early 1990s before their eventual collapse. Here’s a quote from the Oxford Handbook of Capitalism

“Theoretically, the Japanese could have bought all the property in the United States by selling off Metropolitan Tokyo. Just selling the Imperial Palace and its grounds at their appraised value would have raised enough cash to buy all of California”

For a bit of context on the magnitude of the rise in these markets, the Japanese real estate market’s worth grew by 75 times from 1955 to 1990. The Japanese stock market was even crazier, tripling in size in the 1980s. Scholars have debated the cause of the crisis but there is consensus that the sudden bursting of the bubble (or party, I like to call asset bubbles party for some reason) was primarily due to the Bank of Japan (BOJ) raising interest rates.

Central Bank-kun went bang bang on interest rates as it saw that the asset bubbles were getting more unsustainable and popped it the old-fashioned style like the Federal Reserve did in 1928 (which by the way, triggered the Great Depression, economists have a way of describing these things for some reason).

What were the Impacts of BOJ being a party pooper?

There are primarily four economic trends that characterized the Lost Decade in Japan when the party was over.

1. Stock market decline: The Nikkei 225 declined from its peak of 38,916 on 29 December 1990 to just half that level of 16,925 on 30 December 1992. It did not reach that peak ever before, with the closest one being recently at 33,243 on 19 September 2023. 30 years and they are still not there.

• Property market decline: Residential property prices index in Japan peaked at 182.8 in the first quarter of 1991 before declining continuously to its absolute low of 97.7 in 3Q 2009, 16 years later. It has since slowly recovered with the latest index being 135.4 in 1Q 2023, still way off the peak.

• Deflation: They say inflation is bad. They haven’t met deflation. I don’t think anyone in Malaysia

or rather in many parts of the world faced this problem in their lifetime before. Here’s why. Imagine today the price of eggs is US$5.00 for a carton and someone comes along and tells you that the price will be reduced to US$4.50 the following month. Die, die you are not going to spend on eggs this month. That’s exactly what happened to Japan, because of the collapse in the stock and property market, consumer confidence was so low that people started saving more and not spending. That in turn led to lower prices. This deflation lasted for decades.

• Slow economic growth: Guess the average gross domestic product growth rate before and after 1990. Here are the numbers and I guess they will speak for themselves.

1960 – 1990: 6.2%

1991 – 2022: 0.8%

Hence, for China to have a lost decade, these economic trends would have to happen over a prolonged period (probably 10-15 years).

China does have some of these trends already but it’s … complicated

Let’s tackle the biggest elephants in the room – the stock and property market. We need to examine whether China underwent a big boom in its stock and property markets that mirrors Japan’s experience. It did to some degree but it’s hard to tell really.

1. Stock market bubble and burst: In the past 20 years, there have been two notable trends of boom and bust. The first time around, the Chinese stock market index rose from 33.1 in January 2006 to as high as 156.0 in October 2007. We all know what happened during that. The party in the mortgage-backed asset bubble was ruined by the failure of Lehman Brothers. The second time around, it rose from 55.3 in July 2014 to as high as 129.4 in June 2015, before collapsing again to 75.6 in February 2016.

• Property market collapse in 2022 and 2023: This one is a bit more obvious here. In the past year, the Chinese property market has collapsed in terms of price and activities. Residential property prices have declined for 16 months consecutively since May 2022, averaging -0.8% in growth rates.

These things do mirror Japan’s Lost Decade but the magnitude of the collapses is not on par with what Japan experienced. Furthermore, the Chinese central bank did not ‘pop’ the bubbles as most of these declines were due to more structural problems in the economy and that’s where this got more complicated.

And the problems run deep for its economic model

The property sector decline in China is just the tip of the iceberg. While not on the scale of Japan’s, the homeownership rate in China is sky-high at around 90%. Japan’s one is 55%, much lower.

Most of the Chinese household wealth is concentrated in housing naturally and a decline in property prices causes a greater loss in household wealth in China. Houses are already so unaffordable with the house price to household income ratio at 30 times, the highest in the world.

This partly explains the lacklustre progress in China shifting its economic model to one that is based on consumer spending. Historically, China had always relied on an export-oriented economic model to bring the country out of the debacle of the 1960s and 1970s, where the Cultural Revolution severely stunted economic growth.

To do that, the country needed vast amounts of capital to invest. Hence, the government had explicit policies to ‘encourage’ savings among households. That legacy has stuck till today as household consumption only accounts for 38% of GDP in 2021, a mere 1% increase from 37% in 2014.

Because of this, you could see this impact played out in the ‘revenge spending’ narrative in 2023 after the pandemic. Most investors expected Chinese consumers to spend much more but what they didn’t understand was that the property sector was imploding which adversely affected consumer confidence.

As a result, inflation averaged only 0.3% from March 2023 to August 2023. Even this trend has a caveat to it. The first impression that investors had was that the low inflation was due to lack of a consumer spending which is true to a certain degree.

However, this was also contributed by the decline in producer prices (which measures factory prices for companies) where raw materials and commodity prices came back down to earth after last year’s high prices. Producer prices have declined by an average of 2.6% from October 2022 to August 2023.

This brings us to China’s various deep-seated problems

To put it nicely, China’s leadership is having a rough spot in national policymaking. While it has gained an international game for its ability to produce anything that the world needs, it has done so through copying other countries. It currently does not have enough technological know-how to innovate substantially compared to the U.S. or Europe.

Hence, when the U.S. banned the exports of high-tech products to China, Chinese companies had immense difficulties in producing their very own version. Even countries like Taiwan and South Korea have higher technological capabilities in the semiconductor industry than China.

This doesn’t get any better when we consider that China is ageing rapidly with the effects of the one-child policy being felt today already. A married couple now would have to assume the full responsibility of four parents. According to Statista, the share of the population aged over 60 is projected to increase from 18% in 2020 to 32% in 2040. Fewer people working equals less economic growth.

The Hukou system. Oh boy. If you are from another state in China, you have no land or property rights in a non-native state. Can you imagine the shitshow? You are stuck renting and you would have to go back to your state to get a house.

But most of the time, jobs are not in the state you are living in. The rural-urban migration trends are all screwed up because of this, and that has led to the current property implosion as houses are unaffordable due to excessive demand chasing limited supply.

Lastly, there has been a big Ponzi scheme looming since the 1980s. You see, the Chinese government has always forced capital down the throats of many of its public enterprises since the 1980s under the ideology of socialism with Chinese characteristics.

Most of the public enterprises pocket these loans and funding into their own pockets and forge accounts to make it seem like they have invested the money. What happens is that this funding and capital are woefully unproductive with high rates of default and failure.

However, the government can’t allow them to fail as they provide the Chinese economy with the most amount of jobs. Hence, bailouts after bailouts, and consecutive rounds to capitalize them continued until today. Can you see the problem here then?

Conclusion

If you have stuck until the end, wow just wow. I appreciate that you have read this long-winded article until the end.

To put things into context, China’s experience mirrors some of the characteristics in Japan during the Lost Decade but the context is entirely different.

If anything, it has to employ vastly different strategies to deal with the current economic problems. Let’s hope it doesn’t take 25 years like what Japan did.