China economy faces Japanification risk as property slump drags on

Traders Union
All News
Economic Data
China economy faces Japanification risk

Highlights

China's new housing starts are down 78 per cent from their peak, driving a balance-sheet recession and deepening deflationary risks.
Year-on-year GDP growth reached 4.5 per cent in the third quarter, mainly supported by exports and continued investment in strategic high-tech sectors.
Goldman Sachs projects China’s 2024 gross fixed capital formation at 40 per cent of GDP and a budget deficit of 11.5 per cent, raising concerns over long-term debt sustainability.

Property bust and deflation concerns deepen

As reported by Financial Times, the parallels between China’s current slowdown and Japan’s long stagnation are becoming more visible across consumer behaviour, debt dynamics and demographic pressures. Economists cited in the report say weak domestic demand persists even as exports and selected manufacturing sectors continue to provide support.

Consumer caution is spreading in China, where households are deleveraging and holding back on discretionary spending. Bank lending to households as of August this year declines outright for the first time on record, while youth unemployment stands at 18.9 per cent in August, far above overall urban unemployment of about 5 per cent.

The property downturn remains central to the concern. China’s housing bubble, which peaked as roughly a third of the economy, has contracted sharply since it burst in 2021, with new housing starts down 78 per cent from their peak, according to Macquarie. Economists warn this is feeding a balance-sheet recession in which households and businesses prioritise repaying debt over new borrowing, weakening demand and reinforcing deflationary pressure.

Analysts also point to a worsening demographic backdrop. China’s population decline begins in 2022 and is expected to be steeper than Japan’s, adding to longer-term concerns over growth, labour supply and consumption. Goldman Sachs says its updated Japanisation index shows China has been more “Japanised” than Japan itself for the past five years.

Exports buy time, but structural risks remain

Despite the gloom, some economists argue China differs from Japan in important ways that could still allow it to avoid a multi-decade trap. Third-quarter year-on-year GDP growth of 4.5 per cent, announced this week, is driven substantially by exports, and China remains less developed than Japan was when its bubble burst, leaving more room for catch-up growth.

Beijing is also continuing to channel resources into strategic sectors such as semiconductors and artificial intelligence as it competes with the U.S. for technological and geopolitical influence. Policymakers appear to believe strong export performance and long-term investment in high-tech industries can buy time while the property market stabilises.

Still, economists remain divided over whether current policy is sufficient. Some argue fiscal support for households has been too limited, with existing subsidies mainly bringing forward purchases rather than lifting incomes or confidence. Others warn China’s export-led cushion may prove vulnerable if major trading partners including the U.S. and EU push back harder against cheap Chinese goods.

The broader question is whether China has truly begun its adjustment at all. Gross fixed capital formation remains unusually high at 40 per cent of GDP in 2024, well above Japan’s 28 per cent and the OECD average of 22 per cent, while Goldman Sachs forecasts the budget deficit will reach 11.5 per cent of GDP this year. That leaves uncertainty over when debt levels become unsustainable and whether growth could slow far more sharply over the next decade.

In our earlier article on Beijing’s latest policy support and third-quarter growth outlook, we noted that economists expected only a modest pickup in GDP as weak consumption and the prolonged property downturn continued to weigh on activity. The piece also highlighted how solid exports and factory output were cushioning domestic weakness, even as policymakers faced pressure to do more to lift demand and confidence.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.