• Economic Research
  • Economics
  • China

Debt, demand and demographics

Can the Chinese economy avoid ‘Japanification’?

With an ageing population, rising debt and vulnerabilities in the property market, China risks following Japan’s path from runaway growth to financial crisis and stagnation. Can Xi’s government rebalance the economy and change course?

Read this article to understand:

  • The structural issues facing the Chinese economy
  • How the crisis in China’s property sector could weigh on growth
  • The potential parallels with Japan’s “lost decades”

The Chinese Communist Party Congress in October was a grand spectacle. But the political ceremony took place against a darkening economic backdrop.

China’s year-to-date GDP growth stood at three per cent as of the third quarter, according to official data, lagging the government’s annual target of 5.5 per cent.

The proximate cause of the growth slowdown is President Xi Jinping’s ongoing zero-COVID policy, which dictates stringent lockdowns to contain coronavirus outbreaks and is stoking widespread anger. In late November, a deadly fire at an apartment block in Xinjiang province sparked protests in several cities, after claims strict lockdown procedures had been a factor in the death toll.

But China also faces deeper structural problems. The population is ageing quickly and Beijing is struggling to manage an economic transition away from debt-fuelled investment towards consumer-led growth. A crisis in China’s property sector could yet spread contagion into other areas of the economy.

These factors have led some experts to draw comparisons between China and neighbouring Japan. In 1991, the bursting of an asset-price bubble brought Japan’s high-growth era to an abrupt end, inaugurating a period dubbed the “lost decades”. As in China, Japan’s ageing demographics are inhibiting government efforts to rouse the economy.

“Although there are differences, it makes sense to worry about the ‘Japanification’ of China,” says David Nowakowski, senior multi-asset and macro strategist at Aviva Investors. “The demographic trends are very similar and there is also a property crisis, as there was in Japan in the 1990s. It is possible China’s high-single-digit growth phase is coming to an end.”

Rising debt

While China is still poorer than Japan was at the time of its crash – per-capita GDP is around $12,000, less than half the $29,000 figure for Japan in 1991 – there are undeniable echoes of Japan’s debt-driven boom in the 1980s (see Figures 1-3).

Figure 1: Private debt in Japan and China (percentage of GDP)
Source: BIS, November 2022
Figure 2: Private household debt to GDP
Source: BIS, November 2022
Figure 3: Private corporate debt to GDP
Source: BIS, November 2022

After market reforms in 1978, China developed quickly via large-scale spending on physical infrastructure over the subsequent decades. Rising debt was not a problem when the economy was growing fast enough to absorb it – but that is no longer the case.

Michael Pettis, professor of finance at Peking University’s Guanghua School of Management, estimates Chinese investment started becoming less productive at some point between 2006 and 2008. Since then, debt has risen sharply, the growth rate has moderated and exports decreased in importance relative to investment.1

Property crisis

Around 25-30 per cent of China’s GDP is now associated with property or related industries, according to data from the Peterson Institute for International Economics.2 But many developers are struggling under high levels of debt. China Evergrande, the country’s biggest developer, defaulted on an international debt payment in December 2021. 

Around 25-30 per cent of China’s GDP is now associated with property or related industries

Alarmed by leverage in the sector, the government announced “three red lines” to restrict borrowing in August 2020 and house prices have since begun to decline. This has created problems not just for developers but also local governments, whose revenues from land sales have fallen, leaving them less able to service their own debts.

While the property bubble resembles Japan’s in some respects, a precise repeat of Japan’s 1991 crisis is unlikely says Amy Kam, portfolio manager for emerging market debt at Aviva Investors. The centralised Chinese government has more control over the economy than Japan’s did and will try to enact a gradual and controlled deleveraging process that may weigh on growth over a prolonged period.

Domestic demand and demographics

The big question now is what, if anything, will pick up the slack as a longer-term driver of growth as debt-driven investment wanes.

Beijing has acknowledged the need to rebalance the economy by promoting a more sustainable growth model based on domestic demand rather than debt. But private consumption’s share of GDP stands at a lowly 39 per cent, compared with 68 per cent in the US.3 Enacting a transfer of wealth and income from local governments and state-owned enterprises to consumers will be politically difficult.4

The rapid ageing of China’s population could pose a further obstacle to the government’s efforts to rebalance the economy

Another problem is that wealth in China is often held in property; as house prices fall, consumers may feel compelled to tighten their belts rather than open their wallets. And the rapid ageing of China’s population could pose a further obstacle to the government’s efforts to rebalance the economy.

Increased costs for health and social care will put a drag on government and household budgets and could inflict further economic damage on top of the unpopular zero-COVID policy.

A recent study by the International Monetary Fund (IMF) shows an ageing population tends to lower the natural rate of interest.5 Low rates of interest restrict the scope a central bank has to revive the economy during periods of crisis, as Japan has found. Deflation is another risk.

But an ageing population is not all bad news. China’s population is ageing partly because its citizens are healthier and living longer.6 And it is possible a decline in the working-age population may push up wages by boosting the bargaining power of those in the workforce, potentially helping improve consumption.

Investment implications

While China could yet avoid Japanification over the long term, many experts are revising down their outlooks for Chinese growth. The consensus among economists surveyed by Bloomberg is that growth will remain below five per cent for each year through 2024.7

Given its size, a slowdown in Chinese growth is of obvious significance to the global economy. Nowakowski argues the biggest impact of a Chinese slowdown would be felt among its main trade partners in emerging markets, along with a few advanced economies, including Germany.

A slowdown in Chinese growth is of obvious significance to the global economy

The vulnerabilities in China’s property sector carry obvious risks for investors in its domestic markets. Equity investors are concerned about potential spill-overs and the state of corporate balance sheets, along with the ongoing impact of the zero-COVID policy.

Over the longer-term, however, the need to promote greater domestic consumption could create opportunities, argues Alistair Way, head of equities at Aviva Investors.

China is likely to want to incentivise a shift of savings away from property towards financial instruments, which could benefit Chinese financial services firms. Rising domestic consumption would also benefit domestic companies in other sectors including consumer electronics and electric vehicles.

Related views

Want more content like this?

Sign up to receive our AIQ thought leadership content.

Thank you for subscribing to receive our upcoming AIQ thought leadership. You will receive a confirmation email shortly.

To view our current live content, please visit our Views hub.

Please enable javascript in your browser in order to see this content.

I acknowledge that I qualify as a professional client or institutional/qualified investor. By submitting these details, I confirm that I would like to receive thought leadership email updates from Aviva Investors, in addition to any other email subscription I may have with Aviva Investors. You can unsubscribe or tailor your email preferences at any time.

For more information, please visit our privacy notice.

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.