The current real estate crisis in China evokes memories of Japan in the 1980s, where the situation slowed economic growth for decades. Are these fears justified?
In many ways, China’s current situation is reminiscent of Japan’s in the late 1980s, when the real estate bubble burst and economic growth was sluggish for thirty years thereafter. Two striking similarities between the two economies in particular raise the question of whether China can expect equally weak economic performance. On the one hand, China, like Japan at the time, has experienced huge house price inflation and now faces the risk of a substantial real estate bubble, which is gradually deflating. Secondly, the proportion of older people is increasing in both countries. Such rapidly ageing societies with a shrinking workforce place a major strain on economic growth potential.
Despite these similarities, there are also significant differences between the two countries. Three of them deserve special mention:
- Firstly, the countries differ in their respective political systems. In China, the state plays a dominant role in the economic agenda. It also exercises strong control over purchasing, selling and pricing in the real estate market. While growth in real estate prices fell sharply into negative territory in Japan in the 1990s and remained there for a long time, real estate prices in China have remained relatively stable, including in times of declining residential construction activity – even though they are under pressure from the current recession. Relatively stable real estate prices are crucial, as more than half the assets of the Chinese population are tied to real estate.
- Second, strict capital controls in China restrict investment opportunities abroad. While the Japanese were able to avoid depreciating domestic assets, thus accelerating downward pressure on asset prices, the Chinese have much less scope for that.
- Thirdly, China is at a different stage of development from that of Japan in the 1980s. In China, for example, the level of urbanisation is around 60%, while in Japan it was 80% in the 1980s, where it has remained ever since. Burgeoning urban migration is expected to boost demand for urban housing, such as rental apartments, which are often provided by the public sector. Increasing public sector residential construction activity may thus offset, at least in part, the declining demand for private housing. Moreover, Japan was already a very advanced economy in the 1980s, with relatively low income disparities between regions, consistently highly developed infrastructure, sound institutions and a large proportion of private companies. In China, on the other hand, there are huge disparities between the big, flourishing metropolises such as Shanghai, Beijing and Shenzhen and much of the rest of the country. In addition, a large proportion of labour and capital is still not used efficiently. Assigning these economic factors to profitable companies can quickly lead to productivity gains – even without major advances in innovation. Ultimately, the positive prospects of sustained high productivity growth can compensate for the negative effects of a shrinking workforce to a certain extent.
These differences, despite many similarities, make it unlikely that the China of today will experience a similar growth slowdown to Japan in the late 1980s. Instead, China faces its own challenges to its future growth potential. On the one hand, the centralisation of Xi Jinping’s power and increasing state intervention in the private sector could slow down innovation processes. In addition, the widening gap between China and the West, as well as the continued decoupling from the US, may have far-reaching effects on long-term growth prospects. After all, China remains heavily dependent on foreign technology and global trade.