Can China get its mojo back?

Please note: All data referenced in this article are sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

The Chinese economy has been hobbled by a troubled property market. Growth is likely to slow in 2024, at 4.8%, dipping below the government’s 5% target level. 

The outlook for next year is not any rosier. Growth is forecast to expand by only 4%. And, that’s before the election of a new US administration committed to taking measures that could worsen the trade war between the world’s biggest superpowers.

The consumer, battered by the psychological scars of the COVID-19 pandemic, as well as a slump in the real estate market, lies at the heart of the economic outlook for China. Households have seen the value of their savings slide since a housing bubble burst in 2022. In turn, shoppers have been more circumspect when splashing the cash.

When Japanification becomes Chinafication

In addition to weaker consumer confidence and a troubled housing sector, debt levels are on the rise and inflation levels remain stubbornly low. Sound familiar?

For those of a certain age, Japanification is a term to fear. But, since troubles in the property market started bubbling up in 2022, the term has been increasingly applied to China. It is easy to see why, when examining the similarities between its economy of today, and the Japanese one of the 1990s, in the wake of a deflating property bubble.

So, just how similar are the two Asian economic giants? Applying Japanese economist Takatoshi Ito’s measure for the extent of Japanification evident in an economy, the answer is quite similar.

Learning from Japan’s experience

From the bursting of a real estate bubble, consumers weighed down by debt and deflationary risks, there are clear similarities between the China of now and the Japan of the 1990s. However, look again, and there are also differences.

In dealing with China’s situation, the authorities can draw on the Japanese playbook, seeing how long the healing process can take if some tough actions are delayed, and understanding what extreme measures could be needed. 

However, China’s population is ageing more quickly than was the case for Japan three decades ago. The number of people aged over 65, is expected to surge from 12% of the total in 2020 to 20% by 2032, according to United Nations’ estimates¹. Furthermore, property constitutes double the share of household wealth than it did for Japan, so squeezing household budgets more strongly.

The Chinese authorities showed in October that they are very much aware of the potential costs of doing too little, too late. They highlighted that a counter-cyclical package of measures was being considered or actioned. These included recapitalising large Chinese banks, cash handouts to consumers and interventions in the real estate market. In another move designed to tackle the country’s long-term debt sustainability, an austerity drive was invoked for public servants. 

Still a land of plenty investment opportunities

The return of Donald Trump to the world stage, and the uncertainty over how much his apparent penchant for trade tariffs turns into policy, could hit global growth prospects. Add in a mushrooming number of retirees and the Chinese government is under pressure to act. Demographics, in particular, cap the country’s economic growth prospects, perhaps to a figure no higher than 5%.

However, the stimulus measures and a re-orientation of the nation’s industries should create ample scope to increase exposure to China. It is the leading producer in several high-tech sectors, something that will be very hard to wrestle from it, for all the potential for an intensified trade war with the US.

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