- China’s economy is stumbling and is likely headed for a lost decade similar to Japan’s.
- That’s according to former IMF official Desmond Lachman, who said China may no longer be the world’s growth driver.
- But a lost decade also means “we no longer need to worry that China will eat our economic lunch.”
China’s economy is likely headed for a so-called lost decade akin to the slump that hit Japan three decades ago, according to a former International Monetary Fund official.
After rebounding strongly early this year from the end of COVID restrictions last year, more recent indicators have pointed to sputtering growth.
In an op-ed in Barron’s, Desmond Lachman attributed much of that to the bursting of China’s housing and credit market bubbles, noting that Japan experienced a similar bust in the 1990s.
“We may be at the end of the period when China, the world’s second-largest economy, served as the world economy’s main growth engine and the main driver of international commodity prices,” he wrote.
Worries about China’s economy have rippled through markets in recent months, and other commentators have warned that the reopening narrative from zero-COVID policies isn’t what it seems. Foreign investors are increasingly moving out of Chinese markets as well.
Lachman, who is now a senior fellow at the American Enterprise Institute, said China’s failure to sustain a robust recovery shouldn’t be a surprise, given that home prices have fallen for 12 straight months while local governments are struggling to repay debts as land sales hit a standstill.
While China is unlikely to experience a US-style bust that followed the housing boom in the 2000s, the Chinese government’s efforts to aid its own housing market and weak local governments mean there won’t be much credit available for healthier parts of the economy, he said.
“One silver lining of a likely lost Chinese economic decade is that we no longer need to worry that China will eat our economic lunch,” Lachman added. “As occurred with the supposed Japanese economic miracle in the 1980s before it, we will find that the Chinese economy had clay feet.”
Another silver lining is that a slower economy will lower prices for commodities and Chinese exports, providing some inflation relief, he said. “That might allow the Federal Reserve to let up on its newfound monetary policy religion.”