China heading for Japanese stagnation? says Macquarie

Harris Marley

Global Courant

A food delivery boy sits outside a restaurant in a shopping mall in Beijing on May 30, 2023.

Jade Gao | Afp | Getty Images

BEIJING — China’s economic recovery from the pandemic is expected to broaden, meaning the country is not yet heading for a Japanese-style stagnation, said Macquarie’s Chief China Economist Larry Hu.

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China’s recent economic data largely disappointed investors hoping for a sharp recovery in the world’s second-largest economy after the end of Covid controls in December. Youth unemployment hit a record high of over 20% in April.

In a report Friday, Hu attributed the recent economic slowdown to a “premature” withdrawal of policy support after better-than-expected first-quarter data.

Although the worst is behind us, the recovery is far from self-sufficient.

Larry Hu

China’s chief economist, Macquarie

Going forward, he expects policymakers to remain accommodative given the lack of inflation and high youth unemployment – ​​with more urgency to ease as year-over-year comparisons weaken in the third quarter.

“As the recovery broadens over time, the economy will once again enter an upward spiral with stronger demand and confidence,” Hu said.

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According to state media, China’s highest executive body, the State Council, called for improving the business environment and removing local barriers to market entry at a meeting on Friday. The country would also expand purchase incentives for new energy vehicles as a way to boost consumption, state media reported.

At the meeting, led by Premier Li Qiang, it was noted that the foundations of China’s economic recovery are not yet solid.

Similar, but not the same as Japan

“While the worst is behind us, the recovery is far from self-sufficient,” said Macquarie’s Hu. “Companies are reluctant to hire because of weak consumer demand, and consumers are reluctant to spend because of the weak labor market.”

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“Such a self-fulfilling downward spiral bears some resemblance to Japan’s ‘lost decades’,” he said.

Japan’s economy grew rapidly in the 1970s and 1980s, but stagnated when the asset price bubble burst in the 1990s and stock and real estate prices plummeted. Japan was the world’s second-largest economy for decades, until China overtook it in 2010.

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“The lack of a self-sustaining recovery in China today is primarily a cyclical, not structural phenomenon,” said Hu. “History suggests that concerns about ‘Japanification’ will ease once the recovery becomes more entrenched.”

He pointed out that earlier concerns about economic recovery in 2012, 2016 and 2019 all led to market corrections in the second quarter of those years – before the MSCI China Index moved higher.

The iShares MSCI China ETF is down about 4% so far this year.

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But with just four months on the books after China’s big Chinese New Year holiday, longer-term trends remain difficult to predict.

A good example is the huge real estate sector in China, where a nascent recovery seems to have stalled.

“If we extrapolate sales data in the first quarter, you could expect new home sales to increase by 10% or more this year,” Hu said. “If you extrapolate the Q2 sales data, you could expect it to be down 10% or more.”

“The reality may be somewhere in between.”

China heading for Japanese stagnation? says Macquarie

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