Now is Not the Time for China to Act Timidly – Macquarie

China’s economic challenges are being likened to Japan’s lost decades, according to analysts at Macquarie, who argue that now is not the time for hesitation in policy responses.

The discourse surrounding Japan’s prolonged economic stagnation has persisted for years, but a key observation remains: Japan has never fully recovered and has only recently begun to show tentative signs of improvement.

Macquarie asserts that the difficulties facing China are analogous to those experienced by Japan during its lost decades. Both economies have gone through extended periods of high saving rates, yet there has been a lack of consistent policies to encourage consumption of those savings.

Consequently, both nations became overly reliant on investment and exports, which in turn led to issues like overcapacity, disinflation, and declining returns on investment.

As disinflation became more pronounced and returns decreased, both households and corporations reduced their spending, anticipating lower prices while seeking to build their wealth and savings.

Despite China’s closed capital account and non-convertible currency providing a greater degree of policy latitude, the fundamental issues facing the economy appear similar to those in Japan. The longer these underlying problems remain unaddressed, the more entrenched they are likely to become.

Similar to Japan in the 1990s, China appears hesitant to tackle these issues head-on. Measures such as a 20 basis point interest rate cut and lower reserve requirements are unlikely to spur significant change; the real challenge lies not in the cost or availability of money, but rather in the deficiency of demand for it.

Macquarie recommends that Chinese authorities consider a substantial reduction in real estate risk, advocating for direct state support equivalent to at least 5% of GDP. Additionally, significant local and state-owned enterprise debt should be transferred to the central government’s balance sheet, enabling local governments to stabilize their revenue sources. Implementing a nationwide universal basic income would also be beneficial.

However, Macquarie observes that such policies are currently seen as too radical. “Timidity and procrastination continue to prevail,” they noted. Until more profound paradigm shifts in policy occur, it is believed that China’s stock market will experience volatile trading opportunities but will lack consistent returns.