China’s Economic Crossroads: Reform or Risk a “Lost Decade”

The Looming Specter of Stagnation

According to a prominent economist, China, the world’s second-largest economy, faces a stark choice: reform its economic system or risk a “lost decade” of sluggish growth, mirroring Japan’s economic stagnation in the 1990s. This dire assessment comes amid growing concerns over China’s struggles to orchestrate a convincing post-pandemic economic recovery.

A Decade Adrift

Rory Green, the chief China economist at GlobalData.TS Lombard, has sounded the alarm, stating, “China could have a lost decade of growth.” Such a development would make China susceptible to the phenomenon known as “Japanification” – a reference to Japan’s “Lost Decade” of economic stagnation in the 1990s, which followed the bursting of the country’s asset and credit bubbles.

Mounting Challenges

China currently faces a multitude of challenges that threaten its economic stability. A property crisis, deflationary pressures, a demographic crisis, and trade tensions with the West have all contributed to the country’s economic woes.

The Debt Dilemma

Despite these troubles, Beijing appears reluctant to stimulate the debt-laden economy, even though it recognizes the risks of insufficient economic stimulus. As Green notes, “part of the current economic malaise is man-made as authorities attempt to deal with past excesses — , property and local government debt.”

Ideological Roadblocks

Green argues that China’s economic choices are clouded by an ideological divide rather than a lack of resources. “Since 2016, there’s been a shift in the policy reaction function. Leaders are working to establish a new political-economic model, aiming for reduced dependence on debt-fueled property-led growth,” stated by Green.

The Xi Factor

At the heart of this ideological divide is Chinese leader Xi Jinping, who believes “China must undergo painful structural reform before authorities can stimulate or risk exacerbating existing structural imbalances.” On the other hand, technocrats in China generally believe that the country needs to reform and grow, or risk facing a Japan-style lost decade, according to Green.

A Shift in Mindset

“As China’s economy maintains its sluggish momentum, Green believes Xi will pivot towards a more pro-growth mindset, driven by concerns about welfare and social stability”. But, he cautions that even with a change in policy direction, it would take time for China’s economy to regain its momentum. “The old growth model is broken, and a new one is emerging, albeit slowly,” wrote Green.

The Path to Recovery

The underlying message is clear: China’s ability to avoid a “lost decade” of economic stagnation hinges on its willingness to implement crucial reforms. Without decisive action to address the mounting challenges and structural imbalances, the world’s second-largest economy risks following in the footsteps of Japan’s economic malaise in the 1990s, a fate that could have far-reaching consequences for global economic stability.

A Cautionary Tale

China’s current predicament serves as a cautionary tale, highlighting the importance of proactive economic reform and the dangers of complacency. As the world watches with bated breath, China must navigate this critical juncture, weighing the risks and rewards of its economic choices .

Will China heed the warnings and embrace the necessary reforms, or will it succumb to the allure of short-term solutions, risking a prolonged period of stagnation? The answer to this question will not only shape China’s economic future but also have profound implications for the global economy.