China now more ‘Japanised’ than Japan, Goldman Sachs index shows

The latest:

China has registered as more Japanised than Japan itself for the past five years, according to a Goldman Sachs update of an index originally devised by economist Takatoshi Ito. The reading lands as household bank lending declined outright in August for the first time on record, and as total public and private debt approaches 300 per cent of GDP on Capital Economics calculations.

Details:

• The property bust: New housing starts are down 78 per cent from their peak, according to Macquarie, against a 73 per cent fall in the United States between 2005 and 2009 and a 65 per cent drop in Japan. At its height, real estate accounted for a third of China’s economy, a bubble larger than Japan’s late-1980s frenzy.
• Credit demand: Total outstanding renminbi loans rose 4.8 per cent in September from a year earlier, a record low and down from 4.9 per cent in August. Gavekal Dragonomics analyst Xiaoxi Zhang reported that up to 10.6 per cent of the adult population had overdue loans last year, against about 7.8 per cent a year earlier.
• The bond signal: Richard Koo, chief economist at Nomura Research Institute, called the 1.7 per cent yield on 10-year government bonds “absolutely ridiculous” and said it should be at least 3 or 4 per cent. Investors unconvinced by other opportunities have parked cash in government debt, pushing prices up.
• The counter-argument: Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs, said Beijing has worked to keep manufacturing competitive and hold market share. Third-quarter GDP growth of 4.5 per cent year on year, announced this week, was driven substantially by exports. China’s trade surplus hit $1.2tn last year, the largest ever recorded by any country.
• Manufacturing divergence: Japan’s share of global manufacturing value fell from 23 per cent in 1995 to 11 per cent in 2010, while China’s was still 28 per cent in 2024. Macquarie’s Larry Hu noted Japanese corporate capital expenditure fell about 14 per cent from 1990 to 2010, which he said explains why Japan missed the internet and semiconductor waves.
• Beijing’s case: A Chinese government adviser, speaking anonymously, said leaders believe long-term investment in chipmaking and AI will deliver a payoff Japan never saw, and that the property downturn was engineered rather than allowed to burst on its own. The adviser did not say how long the leadership expects weak domestic sentiment to last.
• The demographic clock: Japan’s population began shrinking in 2009; China’s decline started in 2022 and is projected to be steeper. Youth unemployment stood at 18.9 per cent in August, even as official urban unemployment held near 5 per cent.
• The lost generation: Gavekal’s Andrew Batson calculates about 74mn Chinese have finished education and entered the workforce since 2022. Economist Zhu Ning said younger buyers see no investment logic in property after price falls of 30 to 40 per cent in five years. Goldman analysts rate this expectation channel as more consequential than demographics.
• The policy gap: Koo said many in China understand the need for fiscal stimulus but the government has done nowhere near enough to offset deflationary pressure. Subsidies for televisions and appliances brought spending forward rather than lifting incomes. The IMF warned last week of growing numbers of zombie companies across Asia kept alive by lenient banks.
• How deep it runs: Michael Pettis of the Carnegie Endowment argued China has not really begun adjusting because debt keeps rising rapidly, and predicted an investment surge later this year to defend the growth target. Gross fixed capital formation was 40 per cent of GDP in 2024, against Japan’s 28 per cent and an OECD average of 22 per cent.

Background:

Japan’s property bubble burst in 1990, triggering decades of stagnation and deflation. The 1979 book Japan as Number One fuelled predictions Tokyo would overtake Washington; those forecasts survived into Japan’s first lost decade before fading entirely.

Between the lines:

Beijing’s bet rests on the one place the parallel breaks: manufacturing share held at 28 per cent while Japan’s collapsed. But the $1.2tn surplus that funds that bet also invites the pushback Japan absorbed through the 1985 Plaza Accord — and Tilton argues China, without electoral constraints, can keep diverting resources from households far longer than Tokyo managed.

What’s next

Watch whether Beijing pivots to forceful housing stimulus, as Macquarie’s Hu says its policy space allows; whether the investment surge Pettis predicts arrives before year-end; and whether the trade surplus matches last year’s record.