China risks heading in the same worrying direction as Japan, a nation now synonymous with decaying first world economies, according to financial strategists.
The report by Bank of America Merrill Lynch has urged the Chinese authorities to act swiftly to prevent lapsing into a stagnant economic phase similar to its island neighbour's.
"In general, it appears to us that the problem facing China today may be more serious than Japan's," the report said. "We chose 2014 to be year zero because there are strong signs that the house cycle in China is tipping over."
Japan experienced remarkable growth in the second half of the 20th century to become the world's second-largest economy but derailed in the early 1990s. It is now mired in high inflation, low growth and significant government debt.
While China was still growing rapidly, Merrill Lynch said it might have an even bigger debt problem than Japan.
The last few months have been full of increasing concerns about the Chinese economy from investors who are worrying about its resilience as the emerging economic powerhouse is buffeted by disappointing data, particularly in the residential property market that is a key economic driver.
But the Merrill Lynch report, released this week, is the first to suggest China may go the way of the first Asian tiger economy as bad debt accumulates rapidly and assets begin to deflate in value.
"If our assessment is correct, then banks, developers and building materials should start to underperform significantly reasonable soon," the report said.
The analysts said China's emerging issues were likely to continue as it was facing similar problems to those confronting Japan before its asset bubble burst after peaking in 1989.
Actually, lots of people have said China will go the way of Japan. But many countered that China has learned the lessons of Japan and will avoid the pitfalls. We shall see.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
Japan came a-cropper owing to a property bubble that blew up the banks and a subsequent failure to recognise the losses stalled lending which combined with aging demographics and a phenomenal entitlement culture to derail total factor productivity growth. The nation then sank into deflation.
China faces the same reckoning in its banks and it will not be helped by its similar demographic profile.
However, it also has one big advantage. China is still poor and backward and has very low capital intensity per worker. In short, it has oodles of latent productivity growth to unleash if it can get its policies right. That will mean doing all of the things that the Xi Jinping regime has been talking about with structural reform: breaking SOEs, reducing wasteful investment, shifting banks away from stimulus and towards higher return investments, moving up the value chain, interest rate and currency liberalisation, so on and so forth.
I’m quite hopeful China can keep growing at reasonable rates (3-4%) long into the century. The catch is, to do so, it must kill the wasteful investment monster that Australia feeds upon.
China is now far more systemically important in today’s world than Japan was at any point in the 1980′s to 1990′s time-frame.
IMHO If China goes pear shaped the contagion will be impossible to stop, this wont just create another “lost generation” because the economic, social and political vectors wont stay contained they’ll spread around the world with such velocity that the GFC will look like a Sunday picnic. If you listen closely to the republican hawks you can already here the steady beat of the war drums, and that’s definitely not the right answer.
I know that I can hear these drums so I’m hoping that others closer to the source can also hear this beat and hopefully take the right action to support any Chinese meltdown.
In 1990 Japan was the second most technologically advanced economy in the world, a leader in advanced manufacturing, including automotive, electronics and advanced materials.
China is a third-world shithole that hasn't even got the whole way through it's Industrial Revolution, much less an advanced first world economy.
China go the way of Japan ... pffffffff...... in their dreams.
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