The five developments to emerge in China that are similar to Japan – Natixis

As a result of significant population ageing, strategist at Natixis believe that China’s economy will be completely transformed to become similar to the Japanese economy due to five developments.

Sluggish domestic demand and growth being dependent on exports 

“Domestic demand is expected to grow little in China as is already the case in Japan because households are building up large precautionary savings in anticipation of a deterioration in pension systems. As a result of sluggish domestic demand, growth depends mainly on exports, which makes the economy dependent on the rest of the world, and this was not the strategy of the authorities in China or Japan.”

Low potential growth

“The decline in the working-age population, due to very low immigration, in China as in Japan, leads to low potential growth. Given productivity gains and demographics, potential growth will not exceed 2-2.5% in China and will be barely positive in Japan.”

Private sector deleveraging

“The rise in the proportion of elderly people relative to young people in the population is likely to lead to private sector deleveraging (pensioners deleverage, young people get into debt), which has actually been seen in Japan and is starting to be seen in China, and which reinforces the weakness of domestic demand.”

Sharp increase in public debt

“Fiscal policy must become expansionary in China, as has been the case in Japan, in order to: Stimulate domestic demand, which has been weakened; Substitute public debt for private debt, which is declining.”

A highly expansionary monetary policy

“The increase in public debt will lead, in China as in Japan, to a highly expansionary monetary policy, which is necessary to ensure public debt sustainability.”