China's Economic Challenges Compared to Japan's Lost Decades: A Warning from Macquarie
In a recent note dated Sept. 24, analysts at Macquarie drew parallels between China's current economic challenges and Japan's lost decades. The debate surrounding Japan's prolonged period of economic stagnation has been ongoing for years, but the undeniable truth is that Japan struggled to fully recover until recently.
Both China and Japan faced similar issues of high saving rates without adequate policies to stimulate consumption, leading to an overreliance on investment and exports. This resulted in overcapacities, disinflation, and diminishing returns on investments. As disinflation worsened and returns dwindled, households and businesses cut back on spending, anticipating lower prices while seeking to increase their savings.
While China has certain advantages such as a closed capital account and non-convertible currency, the fundamental problems and symptoms mirror those of Japan. Without decisive action, these issues will become more entrenched and difficult to resolve over time.
Despite modest measures like a rate cut and lower RRR, Macquarie believes that China needs to take more drastic steps to address the root causes of its economic challenges. The bank suggests a significant reduction in real estate risk, a transfer of debt to central government books, and the implementation of a universal basic income across the country.
However, Macquarie notes that current policies are seen as too radical, and China continues to hesitate in making substantial changes. Until more significant shifts in policy occur, the bank predicts that China's equities will offer sporadic trading opportunities but lack consistent returns.
In conclusion, it is essential for investors to be aware of the parallels between China's economic challenges and Japan's lost decades. By understanding the risks and potential policy responses, individuals can make informed decisions to protect their finances and investments in an uncertain economic landscape.