China Faces Potential 'Lost Decade'
China may be entering a period of economic stagnation and deflation similar to Japan's lost decade of the 1990s, according to economist Alicia García-Herrero. She argues the country's deep downturn in the property sector is impacting household wealth and leading to stagnation rather than a dramatic financial crash. García-Herrero suggests India is positioned to rise as a counterbalance in a new multipolar global system.
- Japan's "Lost Decade" extended for roughly 30 years, with its nominal GDP falling from $5.55 trillion in 1995 to $4.27 trillion by 2025. During this period of stagnation, real wages fell, and companies opted to hold cash rather than invest in research and development. The crisis was triggered in the early 1990s by the collapse of a massive asset price bubble, which led to widespread bad debt for banks and a halt in credit growth. - China's property sector, which accounts for about a quarter of its economy, has been in a downturn since 2020. This was precipitated by new regulations in 2020 known as the "three red lines," which aimed to control developers' debt levels and led to a liquidity crisis for major firms like Evergrande. A Hong Kong court ordered the liquidation of Evergrande in January 2024. - The slump in China's property market has significant implications for household wealth, as residential property makes up around 70% of urban household assets. The fall in home prices has led to decreased consumer spending and a sharp increase in household savings. The real estate crisis has erased an estimated $18 trillion in household wealth. - In January 2026, new home prices in China fell for the seventh consecutive month, with prices in the largest "tier-one" cities dropping 2.1% year-over-year. Sales by the top 100 developers had already fallen by a third year-on-year in July 2023. There are an estimated 60 to 80 million empty apartments across the country. - The International Monetary Fund (IMF) projects India's economy will grow by 6.6% in 2025, outpacing China's forecasted growth of 4.8%. This continues a trend where India's growth is expected to be significantly faster than other emerging economies. - Despite the current downturn, some long-term forecasts predict China will overtake the U.S. as the world's largest economy by 2036. However, this is a slowdown from previous projections, reflecting the impact of its COVID policies and trade tensions. - To combat the economic slowdown, Chinese authorities have eased home purchase restrictions and cut mortgage rates. However, they have been hesitant to implement large-scale stimulus, preferring more targeted support. The government has also restricted the release of some economic data related to the property market.
