China heading for Japan-like stagnation? Macquarie says worst is behind

BEIJING — China’s economic recovery from the pandemic is set to broaden, meaning the country isn’t headed toward Japan-style stagnation just yet, according to Macquarie’s Chief China Economist Larry Hu.

China’s recent economic data largely disappointed investors hoping for a sharp rebound in the world’s second-largest economy after the end of Covid controls in December. Youth unemployment hit a record high of above 20% in April.

In a report Friday, Hu attributed the recent economic slowdown to a “premature” withdrawal of policy support after better-than-expected first quarter data.

Going forward, he expects policymakers to remain accommodative given the lack of inflation and high youth unemployment — with more urgency to ease as year-on-year comparisons soften in the third quarter.

“As the recovery broadens over time, the economy will enter another upward spiral with stronger demand and better confidence,” Hu said.

At a meeting Friday, China’s top executive body, the State Council, called for improving the business environment and removing local barriers to market access, according to state media. The country would also extend purchase incentives for new energy vehicles as a way to boost consumption, state media reported.

The meeting, led by Premier Li Qiang, noted the foundation of China’s economic recovery is not yet solid.

“While the worst is behind us, the recovery is far from being self-sustaining,” Macquarie’s Hu said. “Companies are reluctant to hire due to soft consumer demand, and consumers are reluctant to spend due to weak labor market.”

“Such a self-fulfilled downward spiral bears some resemblance to Japan’s ‘lost decades,'” he said.

Japan’s economy grew rapidly in the 1970s and 1980s, only to stagnate when the bubble burst in the 1990s and stock and real estate prices plummeted. Japan was the world’s second-largest economy for decades, until China overtook it in 2010.

“The absence of a self-sustained recovery in China today is mainly a cyclical, not structural, phenomenon,” Hu said. “History suggests that the concern on ‘Japanification’ will subside once the recovery becomes more entrenched.”

He pointed out that previous concerns about economic recoveries in 2012, 2016 and 2019 all led to market corrections in the second quarter of those years — before the MSCI China Index turned higher.

The iShares MSCI China ETF is down by about 4% so far this year.

But with only four months in the books following China’s big Lunar New Year holiday, longer-term trends remain difficult to forecast.

Case in point is China’s massive property sector, where a nascent recovery appears to have stalled.

“Extrapolating the sales data in 1Q, one might expect new home sales to rise 10% or more this year,” Hu said. “Extrapolating the sales data in 2Q, one might expect it to fall 10% or more.”

“The reality may be somewhere in between.”