MNI INTERVIEW: China Can Avoid Japan-style Slump - Advisor

China has sufficient monetary and fiscal firepower to avoid a 1990’s Japan-style decline and recession, which it can deploy to stabilise the property sector gradually without triggering a sharp house-price correction, a senior policy advisor told MNI.

While China exhibits symptoms of “Japanification”, such as a deflating property market, a debt overhang, and worsening demographics, the country will likely avoid sharp asset shrinkages driven by a large-scale housing crash, said Sun Xuegong, head of the decision-making consulting department at the Academy of Macroeconomic Research, which is affiliated with the central planning agency National Development and Reform Commission.

“China still has sufficient policy space to deal with increased debt burdens caused by rising leverage,” he added, pointing to recent moves to cut existing mortgage rates to help boost consumption and swap out maturing local-government debt to ensure fiscal expenditure. “Home prices are unlikely to fall significantly, as the market will gradually bottom out with housing restrictions being eased to cope with oversupply in the market.” (See: MNI: China To Launch Debt Swaps To Address Implicit Liabilities)

He admitted rising leverage following the pandemic had dampened spending power as well as investor and consumer sentiment, but economic and income growth boosted by pro-growth measures can help solve this problem.

NEW ENGINE

Sun noted the economy recovered more comprehensively in August, as supply and demand indicators rebounded, even off the higher comparison base over the same period last year. Prices rose and unemployment improved – especially among youth, he added. “The economy will likely achieve its 5% annual growth target,” Sun argued.

However, a key contributor to Japanification was a fundamental change in longer-term growth expectations. China aims to transition from its traditional property and infrastructure investment growth engines into new ones, but this will take time to reach scale.

Sun believes real estate can still play a significant part within the economy, despite the slower population growth, as urban centers continue to enjoy steady growth. The permanent-resident urbanisation rate remains low at about 65%. Significant demand exists for quality upgrades and age-friendly renovations of existing housing, he added.

Meanwhile, demand for services and manufacturing has grown rapidly to help offset the decline in real estate, Sun continued. Service sector revenue increased 19.4% y/y in the first eight months of 2023, with growth noted in transportation, accommodation, catering and entertainment. Sun said increased consumer strength, not just the post-pandemic recovery, contributed to the service sector gains.

Investment in manufacturing and high-tech industries also showed good momentum, increasing by 5.9% and 11.3% y/y in the first eight months, he noted.

Sun added that it will take some time to restore private-sector confidence with support policies gradually kicking in. The industrial cycle impacts private companies in real estate and electronics more, while increased U.S. technology containment and market entry barriers will also have a negative effect on the latter, he said.