Analyst Warns of Potential 'Lost Decade' for China
China's economy faces significant risks of deflation and a potential "lost decade" analogous to Japan's 1990s stagnation, according to economist Alicia García-Herrero. The country's slow-burning property market collapse, which affects about one-third of fixed asset investment, is a primary driver of this risk. Unlike abrupt Western crashes, this gradual decline is eroding household wealth and confidence, straining an economic model built on massive savings and low wages.
- The property crisis was ignited by Beijing's "Three Red Lines" policy in 2020, which placed strict caps on developer debt and leverage, leading to a liquidity crisis for highly indebted firms like Evergrande. - Beyond the widely publicized default of Evergrande, the crisis has impacted numerous other major developers, including Country Garden, Kaisa Group, Sunac, and Sino-Ocean Group, with some state-backed developers now also facing financial strain. - A key difference in the comparison to Japan is the role of real estate in household wealth; property accounts for approximately 70% of Chinese households' total assets, compared to about 50% for Japanese households in 1990. - Deflationary pressures are a significant concern, with China's producer price index (a measure of factory-gate prices) experiencing years of decline and consumer prices recently slipping into negative territory for the first time in two years. - Consumer confidence has remained low, falling to 89.50 points in late 2025, a significant drop from its historical average of 108.68 and near the record low of 85.50 set in 2022. - In response to the turmoil, the Chinese government is encouraging state-owned firms to purchase foreclosed properties from struggling developers, in part to convert them into affordable housing. - A prolonged Chinese slowdown impacts global trade by reducing its demand for raw materials and industrial components, affecting commodity-exporting countries and disrupting established supply chains. - The deflation in China could be "exported" globally, potentially leading to lower prices for consumer goods in the United States and Europe and contributing to broader disinflationary trends.
