The New StatesmanThe New Statesman

Is China’s economy turning Japanese?

By George Magnus

07 Aug 2023 · 4 min read

informed Summary

  1. China may be in danger of a "balance-sheet recession" similar to the one that led to Japan's long-term economic stagnation after its asset bubble burst in 1990.

The idea of China “turning Japanese”, to borrow from a popular 1980 hit single, has drawn much attention recently. Observers are asking whether China is in danger of a “balance-sheet recession” of the kind that condemned Japan to a long stagnation after its asset bubble burst in 1990. Given China’s global heft and significance – it now accounts for 18 per cent of world GDP – a similar outcome would have dramatic implications for everyone.

A balance-sheet recession, for simplicity, describes conditions in which the mismatch between the assets and liabilities in key sectors becomes so extreme that companies or citizens stop spending and borrowing, as they are compelled to reduce debts and dispose of assets. Normally, only painful structural reforms are able to turn economic performance around.

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