China Will Be The Next Japan: Xi should have studied Japan in the early 1990s rather than the breakdown of the Soviet Union.

• Author: Malmgren, Harald

Will China economically be the next Japan? Will it face a repeat of Japan's experience in the early 1990s? Our answer is a resounding yes. China's household debt surged to 62 percent of GDP last year from 28 percent a decade before. That compares with Japan's experience of climbing to over 60 percent in 1989 from about 26 percent in 1971 (see Figure 1).

China's corporate debt has remained high, at around 160 percent of GDP--above the 145 percent peak in Japan in the mid-1990s.

Furthermore, China's demographics are changing even faster than Japan's, with population growth stepping down and an aging problem that's bigger than Japan's at a similar development stage. Indeed, it was recently reported that China's population has dropped for the first time in six decades, the latest warning bell to sound over the country's demographic crisis.

China's demographic turning point puts it on the same path as Japan, where the population began to decline in 2010 and has fallen every year since. The United Nations has projected that China's population will fall to 1.31 billion by 2050 and 767 million by the end of the century. The 2050 estimate would make China 3.5 times larger than the United States, which is projected to have 375 million people by then. At present, it is 4.3 times larger than the United States.

Another area of comparison is the bursting of the Chinese real estate bubble. Of course, there are some big differences between both countries. Beijing has much greater oversight of the housing market through administrative controls than Tokyo did in the 1990s. China's financial system remains dominated by the state sector. And its capital account is largely closed, leaving Chinese households with fewer options than Japanese households had.

The problems constraining both the supply of and demand for housing in China are not getting resolved. In the longer term, even if property sales stabilize, the downward adjustment from the peak will still mean a lower level of construction activity and materials demand in coming years. That leads to the comparison in Figure 2.

The question then is whether or not the Chinese authorities can orchestrate more than a mere bottom of stability. Recent measures in China will alleviate the developers' debt pressure and improve their liquidity, but unfortunately, they may have little or very limited positive effect on the sector itself. The core problem is that there is weak household interest in buying new homes.

Given the relevance of the property sector to Japan of the 1990s and modern-day China, the comparison is striking. One model that we have seen is none too optimistic about Chinese real estate. It is worth emphasizing that housing is a pillar industry in China, accounting for 20 percent of fixed asset investments and 30 percent of total funding for local governments.

According to the Center for National Balance Sheet's estimates, housing accounted for 40.4 percent of Chinese households' total assets in 2019, down from a peak of 53.5 percent in early 2000s (Figure 3). Of note, the People's Bank of China's survey in 2019 showed that...