Is China on the brink of “Japanification"?
- Markets have been spooked by fears of a “Japanification” of China, which would mean a period low growth, inflation, and depressed interest rates, as happened in Japan caused by a balance sheet recession in the 1990s.
- Similarities are eye-catching, including a troubled real estate sector after a prolonged rise in prices, strong and fast re-leveraging, adverse demographics, deflation risks and correcting stock prices.
- Yet, Chinese property prices have increased less strongly than formerly in Japan, and its stock market is less overvalued. Estimated bad debt in the property sector looks more digestible for banks. Most importantly, the institutional settings differ, with China exerting much more control over property prices, developers, banks and thus deleveraging needs.
- Idiosyncratic risks notwithstanding, a systemic banking crisis is less probable, and the stock market is already largely discounting the various headwinds. However, China’s recovery is likely to be L-shaped, keeping inflation subdued. Monetary policy will remain structurally accommodative, while stock markets face elevated volatility over the medium term. We recommend a slight overweight until there are clear signs of recovery.
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