Of course it is, this is the classic central bank "pushing on a string" scenario.
From Asia Times via MENA FN, July 7:
(MENAFN- Asia Times) As Janet Yellen kicks China's economic tires in Beijing this week, she may be surprised by how often the attention is veering toward neighboring Japan.
It just so happens that Yellen's first China trip as US treasury secretary coincides with intense debate about Asia's biggest economy experiencing a Japan-like“balance sheet recession,” one that, if true, will be devilishly hard to reverse.
The reference here is to economist Richard Koo's oft-cited observation about why Japan plunged into deflation and stagnation in the 1990s. Specifically, this is when economic insecurity prods a critical mass of households and companies to prioritize boosting savings and paying down debt over consuming and investing.
Unlike a formal recession, where gross domestic product (GDP) contracts, the balance sheet variety condemns an economy to underperform for several years.
It's clear that as 2023 unfolds,“investors are concerned that China may have entered a liquidity trap or is experiencing a balance sheet recession,” says economist Carlos Casanova at Union Bancaire Privée, with the caveat that for now“these fears might be overstated.”
Yet the trouble with Japan-like economic funks is how souring sentiment can take on a life of its own. Herein lies the greater risk for Chinese leader Xi Jinping and Premier Li Qiang.
“Chinese policymakers are going about tackling the different factors underpinning weak sentiment,” Casanova explains.“Given the scattered nature of this support, it may take time for upside pressures on domestic asset prices to build and the Chinese yuan to stabilize.”
Koo, too, thinks China“is entering a balance-sheet recession,” partly because“people are no longer borrowing money” due to worries about the growth outlook and stability of asset markets. As households and companies focus on reducing debt, China's growth can't return to pre-Covid levels, he worries.
“I hope Chinese policymakers understand and respond to these challenges, because this might be the last chance for China to reach the living standards of the First World,” Koo explains.
Economist Ting Lu at Nomura Holdings worries that“China's real estate sector is now starting to look somewhat similar to Japan in the 1990s.” As of May, for example, contract sales among the mainland's 100 top developers were down roughly 57% versus pre-Covid-19 levels in 2019.
Though Japan's plunge into deflation had several causes, cratering land prices - and the high degree of exposure to those prices among the nation's biggest banks - was a key catalyst. The overhang set in motion the bad loan crisis that was core to Japan's multi-decade malaise.
Economist Alicia Garcia Herrero at Natixis says land sales are“one of the most important components of China's local government revenue.” She adds that“given the challenges faced by China's property market are largely structural , i.e., slower income growth, population aging, we expect the land sales revenue to continue being under stress down the road.”
Xi's policymakers have sought to downplay such concerns. In March, Chinese Finance Minister Liu Kun argued that a 2 trillion yuan (US$276 billion) drop in land sales would only result in a 300 billion yuan loss to local governments' fiscal positions. That neat assessment may or may not add, however.
Clearly, economists can take the Japan-China comparisons too far. In 2021, economist Lan Xiaohuan published a best-selling book,“Embedded Power: Chinese Government and Economic Development”, detailing the unique dynamics of local property markets....
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