IMF warning on China puts ‘Japanization’ risk in spotlight.
“What’s fast emerging is the risk of China slipping into deflation, or the ‘Japanization’ of its economy,” Bank of Japan (BOJ) board member Asahi Noguchi said on Thursday.
“It’s not clear yet whether China is heading toward a situation similar to Japan. But it’s true China’s real estate sector – the backbone of its economy – is slumping, youth job losses are rising and inflation is weakening,” he said in Japan.
In its World Economic Outlook, the IMF cut China’s growth forecast for this year to 5.0% from 5.2% in April, and warned that its property sector crisis could deepen with global spillovers. It projects growth to slow to 4.2% next year.
Data showed on Friday China’s consumer inflation was flat in September, missing forecasts for a 0.2% gain, highlighting the deflationary pressure China faces even as many other countries combat too-high inflation.
Back during its deflationary period from 1998 to 2013, Japan saw core consumer prices fall 0.2% on average, as slumping property prices hit bank balance sheets and cooled investment.
To be sure, there are differences between what is happening in China and the experience of Japan. For one, China’s balance sheet stress and debt overhang are contained to the real estate sector, notably among troubled developers and local provinces.
On the other hand, China doesn’t have nearly as much consumer spending to keep the economy churning — 38% of GDP in China, 54% in Japan, and 68% in the US — and Chinese park about 70% of their household wealth in that troubled real estate market. That seems to me perhaps ripe for an ugly contagion but, then again, Beijing has so far always found a way through these economic crises without a major meltdown.
Update: China tells banks to roll over local government debts as risks mount – sources. “China has told state-owned banks to roll over existing local government debt with longer-term loans at lower interest rates, two sources with knowledge of the matter said, as part of Beijing’s efforts to reduce debt risks in a faltering economy.”
A necessary restructuring or just adding state-owned banks to the risk pool?