Is Japan-style deflation coming to China?

Recent economic news from China has triggered the same helpless, sinking feeling that gripped me when Japan’s property bubble collapsed in 1991-92. Will this sense of déjà vu continue, with China apparently heading down the same path of deflation and stagnation on which Japan embarked three decades ago?

Earlier this month, Evergrande — the massive Chinese real-estate developer that defaulted on its debt in 2021 — filed for Chapter 15 bankruptcy protection in the United States in the hopes of restructuring its dollar-denominated debts. (Chapter 15 allows a US court to intervene in an insolvency case involving another country.) And now the property developer Country Garden has missed $22.5 million in payments for offshore bonds and suspended trading in 11 onshore bonds, raising the prospect of a default.

These are hardly isolated incidents. China’s real-estate sector — long a leading engine of GDP growth — is buckling under the weight of falling prices, a huge and growing inventory of unsold housing and office buildings, and highly indebted developers. A property-bubble collapse seems likelier every day.

The implications for growth could be dire. Annual Japanese GDP growth amounted to 4-5 per cent, on average, from the mid-1970s through the 1980s. After the property bubble burst, that rate sank to 0-2 percent. To this day, Japan’s economy has not recaptured its pre-bubble dynamism.


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