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Prof. Lu Feng: Why ‘Japan-Styled Recession’ not applicable to China?

Aug 03-2023   



‘Balance-sheet’ recession’ has been cited to describe China’s current economic status. However, Prof. Lu Feng of the NSD believed that it falls into the pitfall of over-generalization. The Chinese economy is passing through dual transformations, which are more complex than what ‘balance-sheet recession’ can capture, he said.

 

The term was coined by Mr. Richard C. Koo, chief economist of Nomura Securities, based on his analysis of the Japanese economy and its travails since the 1990s. Prof. Lu commended the novelties of the theory, including new analytical perspectives and policy advice. Despite some superficial semblances between the Chinese economy and its Japanese counterpart, a deeper look would reveal that the trends, traits, and underlying forces are essentially different between the two, he stressed.

 

Most notably, the two economies are at different development stages. The Japanese economy slid into recession after its per capita income had caught up with the American one in the 1980s and it had become plagued by certain structural limitations. In contrast, currently, China’s per capita income still lags far behind that of major developed countries, and its economy has entered the latter stage of urbanization. The Belt and Road initiative still offers the Chinese economy an extensive space for market expansion, and many Chinese enterprises have moved to the forefront of innovations over recent years. Therefore, the Chinese economy still has the potential to maintain relatively fast growth.

 

Another reason that separates the Chinese economy from the Japanese one is that the former hasn’t been confronted by the concurrent crashes of the stock market and the real estate industry, as was the case with Japan. China’s housing market has run into some rough patches mostly due to policy-induced market fluctuations, but still a far cry from the tsunami-level impacts inflicted on the Japanese economy by an 80% plunge in both housing and stock prices.

 

Also, Prof. Lu said that Chinese households are lowering leverage in asset allocations due to factors different from those confronting Japanese families in the 1990s. The Chinese residents have trimmed consumption and adjusted future expectations as a result of the pandemic. The profound shifts in the real estate market and the lackluster stock market performance have led to some families moving investments into savings accounts.

 

In his recent speech, Mr. Koo suggested that China should continuously apply big doses of fiscal stimulus policy, in particular to the construction industry. Prof. Lu pinpointed it as a telling example of Mr. Koo’s misplaced analysis and policy advice. Mr. Koo said that the construction industry accounted for 26% of China’s GDP, a much-bloated figure compared with the real one at around 7%. According to Prof. Lu, Mr. Koo confounded total output with added value in this regard.

 

Prof. Lu described China’s current economic trend as a ‘low macro-economic boom, characterized by intermittent weakening of total demand, a relatively fast decline in economic growth speed, and impotence of macro stimulus to reverse economic downturn – all over multiple years. Nonetheless, a ‘low macro-economic boom’ means that the economy still retains some degree of flourishing, which is in line with mid to high-paced growth and high-quality development. He advocated objective dissection of the causes of years-long slackening of overall demand and devising countermeasures accordingly.

Prof. Lu Feng: Why ‘Japan-Styled Recession’ not applicable to China?

Aug 03-2023   



‘Balance-sheet’ recession’ has been cited to describe China’s current economic status. However, Prof. Lu Feng of the NSD believed that it falls into the pitfall of over-generalization. The Chinese economy is passing through dual transformations, which are more complex than what ‘balance-sheet recession’ can capture, he said.

 

The term was coined by Mr. Richard C. Koo, chief economist of Nomura Securities, based on his analysis of the Japanese economy and its travails since the 1990s. Prof. Lu commended the novelties of the theory, including new analytical perspectives and policy advice. Despite some superficial semblances between the Chinese economy and its Japanese counterpart, a deeper look would reveal that the trends, traits, and underlying forces are essentially different between the two, he stressed.

 

Most notably, the two economies are at different development stages. The Japanese economy slid into recession after its per capita income had caught up with the American one in the 1980s and it had become plagued by certain structural limitations. In contrast, currently, China’s per capita income still lags far behind that of major developed countries, and its economy has entered the latter stage of urbanization. The Belt and Road initiative still offers the Chinese economy an extensive space for market expansion, and many Chinese enterprises have moved to the forefront of innovations over recent years. Therefore, the Chinese economy still has the potential to maintain relatively fast growth.

 

Another reason that separates the Chinese economy from the Japanese one is that the former hasn’t been confronted by the concurrent crashes of the stock market and the real estate industry, as was the case with Japan. China’s housing market has run into some rough patches mostly due to policy-induced market fluctuations, but still a far cry from the tsunami-level impacts inflicted on the Japanese economy by an 80% plunge in both housing and stock prices.

 

Also, Prof. Lu said that Chinese households are lowering leverage in asset allocations due to factors different from those confronting Japanese families in the 1990s. The Chinese residents have trimmed consumption and adjusted future expectations as a result of the pandemic. The profound shifts in the real estate market and the lackluster stock market performance have led to some families moving investments into savings accounts.

 

In his recent speech, Mr. Koo suggested that China should continuously apply big doses of fiscal stimulus policy, in particular to the construction industry. Prof. Lu pinpointed it as a telling example of Mr. Koo’s misplaced analysis and policy advice. Mr. Koo said that the construction industry accounted for 26% of China’s GDP, a much-bloated figure compared with the real one at around 7%. According to Prof. Lu, Mr. Koo confounded total output with added value in this regard.

 

Prof. Lu described China’s current economic trend as a ‘low macro-economic boom, characterized by intermittent weakening of total demand, a relatively fast decline in economic growth speed, and impotence of macro stimulus to reverse economic downturn – all over multiple years. Nonetheless, a ‘low macro-economic boom’ means that the economy still retains some degree of flourishing, which is in line with mid to high-paced growth and high-quality development. He advocated objective dissection of the causes of years-long slackening of overall demand and devising countermeasures accordingly.