Have we reached peak pessimism on China?

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The author is Chairman of Rockefeller International Corporation

China has fallen”road of miracles” A few years ago, a lot of people are now catching up on this story. An aging population, high debt levels, and a meddlesome government are turning the country into a declining power like Japan in the 1990s, when its economy plummeted Slowing down, but averting outright crisis. Since the consensus call does hold true—a year ago, China’s economy reopened and the United States inevitably fell into recession—it’s worth asking what is missing from the “Japanization” scenario.

It may be flawed, at least in the short term, in two distinct ways. One possible scenario emerged during the early years of Japan’s economic slowdown. After the real estate bubble burst in 1990, the government’s vigorous stimulus led to a strong recovery of the market and economy. From mid-1992 to mid-1993, the Tokyo stock market rose by 80%, and GDP growth accelerated from near zero to 3%. It was the first in a series of false dawns that only exacerbated the long-term economic slowdown. But it’s also possible that China may stage a temporary comeback.

Another possible scenario is that the situation in China is like that in the United States in late summer 2008 – when the housing market was teetering but most analysts did not foresee a looming crisis. Of course, trouble suddenly emerged in September of that year, forcing the government to take every possible step to prevent further economic decline. In this case, China’s next big step is a full-blown financial crisis.

The trigger for Japan’s economic recovery in 1993 was a substantial increase in government stimulus measures, which reached 6% of GDP that year. The triggers for a potential rebound in China are less obvious, given that Beijing has been reluctant to spend aggressively and is clearly wary of accumulating more debt. But Chinese authorities have begun rolling out piecemeal stimulus measures in recent weeks, from easier mortgage rules to tax rebates for some homebuyers. There may be more to come.

Part of the reason for the rebound is China’s technological prowess. A study by the Australian Strategic Policy Institute earlier this year showed that despite Beijing’s crackdown on big tech companies, China remained “sometimes alarming” in 37 of 44 areas of technology, from artificial intelligence to robotics. ahead of the United States. A crackdown on politically sensitive technologies like social media has not slowed down billions in new export subsidies for less sensitive technologies like electric cars and solar energy.

This year, China surpassed Japan to become the world’s largest exporter of electric vehicles, which was one of the highlights of the Chinese stock market. Despite the poor performance in the second quarter, the market has shown some resilience as revenue in consumer sectors such as automobiles and leisure has grown; even if company performance is poor, at least it is no longer below significantly reduced expectations. However, with anti-China sentiment so high, ideological blinders may prevent commentators from seeing anything positive.

The biggest negative is the housing market. Most trend lines point to a coming crash, like the one in the United States in the summer of 2008. Land and housing prices are shrinking at about 5% per year. As of the end of May, real estate investment dropped, and local government land transfer revenue fell by 20%. The “financing tools” used by local governments to buy and sell land now account for nearly half of China’s government debt, which has more than doubled in 10 years to nearly 100% of GDP.

Beijing is partly handcuffed by these debts. In addition, rising U.S. interest rates have limited the extent to which China can use easy monetary policy to support the real estate market without triggering capital outflows and yuan depreciation. To be clear, there are indeed striking similarities between China today and Japan in the 1990s—down to the role of local governments in the debt bubble—and in the long run, China is likely to emerge with a Japanese-style economy. Slow down.

The problem here is recent. Does talk of China’s “peak” indicate that pessimism has reached its limit, or is something worse to come? Since housing bubbles fueled by surging debt tend to lead to deeper recessions than China has experienced so far, a crisis is more likely than a sharp rebound. Whether China’s next move is good or bad, it’s likely to be more dramatic than the chaos expected by consensus.