"China's Economic Growth Slows Amid Real Estate Contraction... Japan-Style Recession Possibility Overstated"

International Finance Center: "Different from Japan, Attributed to Government Policy"

There is a low possibility that China will enter a balance sheet recession similar to what Japan experienced in the past, but if concerns over a real estate market downturn expand, it could lead to a weakening growth trend.

On the 18th, the International Financial Center evaluated in its report titled "Assessment of the Possibility of China Entering a Balance Sheet Recession" that the reduction in corporate borrowing and early repayment of household loans in China are mainly due to government policies, making it difficult to consider that the Chinese economy has entered a balance sheet recession.

A balance sheet recession occurs when households and companies, burdened by increased debt due to falling asset prices, focus more on repaying and reducing debt than before, leading to a contraction in consumption and investment and resulting in an economic downturn. The long-term economic stagnation following the collapse of Japan's real estate price bubble is a representative example.

Recently, Nomura and others pointed out that housing prices in Beijing, China, are at such a high level that they evoke the situation just before the collapse of Japan's real estate market bubble. Despite the Chinese government's accommodative monetary policy, the reduction in corporate borrowing and early repayment of household loans since 2016 could be signals of a balance sheet recession similar to what Japan experienced in the past.

On the other hand, major global investment banks (IBs) judged that the claims about China's potential entry into a balance sheet recession raised by some are somewhat excessive. From mid-2017 to 2022, housing prices in Beijing rose by about 45%, whereas from 1986 to 1991, housing prices in major Japanese cities rose by about 150%, showing a difference in the scale of increase. Also, as of last year, China's urbanization rate was 65%, lower than Japan's 77% in 1988, and China is expected to see gradually increasing demand for real estate such as housing during its ongoing urbanization process.

Kim Woo-jin, a senior researcher at the International Financial Center, said, "The reduction in borrowing by Chinese companies is largely due to the government's debt reduction policy rather than voluntary decision-making, so it is somewhat difficult to interpret it as a signal of a balance sheet recession like Japan's. However, since housing prices in major Chinese cities continue to decline and the real estate market index remains below the level at the onset of COVID-19, indicating a contraction in the real estate market, it could lead to a weakening growth trend."

This content was produced with the assistance of AI translation services.