Now is not the time for China to act timidly

Investing.com – China’s economic challenges are comparable to Japan’s lost decades, according to Macquarie, suggesting that now is not the time to be timid with its policy responses.

The debate about Japan’s lost decades has been raging for years, analysts at Macquarie said, in a note dated Sept. 24, but what cannot be debated is that Japan had never truly recovered, and only recently it finally started to exhibit tentative signs of life. 

The bank maintains that challenges facing China are broadly comparable to Japan’s lost decades – both economies encountered a prolonged period of structurally high saving rates without consistent policies to consume such savings.  

Hence, the only answer in both cases was an excessive reliance on investment and exports, and these led to overcapacities, disinflation, and declining return on investments. 

As disinflation intensified and returns dropped, households and corporates scaled back expenditures, expecting lower prices while demanding greater wealth and savings cushion. 

China’s closed capital account and non-convertible currency offers greater policy room, but the underlying disease and symptoms are likely to be the same, and the longer these persist, the more imbedded and intractable they will become.  

As Japan in the 1990s, China seems reluctant to seriously address these issues, the bank added. The 20bps rate cut, lower RRR and other modest measures are unlikely to achieve much: the problem is not the cost or supply of money but rather lack of demand for money. 

Macquarie suggests the Chinese authorities look for a massive reduction in real estate risk, with direct state support equaling at least 5% of GDP. 

Additionally, they should transfer a significant portion of local and SOE debt to central government books, placing local governments on a viable revenue footing, while also raising and equalizing China-wide universal basic income. 

“Alas, today, these policies are viewed as too radical. Timidity and procrastination is still the order of the day,” the bank said. “Until far deeper paradigm policy shifts, we believe that China’s equities will continue to yield irregular sharp trading opportunities but no consistent returns.”