Why China’s Economic Partners Face Risks in a Historically Dangerous Economy
Season 0, Episode 15
Research: Mosi — Edit: LotusChain-Ai
STOP BORROW AGAIN, This is not "New World Order"
This article have 4 parts and to-long. If prediction from history is your favorite, then start to read
Why China’s Economic Partners Face Risks in a Historically Dangerous Economy
China’s economic partners are at risk due to the country’s ongoing economic challenges, which stem from several critical factors:
1. Real Estate Bubble and Financial Instability
China’s real estate bubble, similar to Japan’s in the 1990s, has begun to burst, leading to declining property values and widespread debt repayment. As homeowners and businesses deleverage, overall demand falls, slowing down economic growth. For China’s trading partners, this means reduced Chinese demand for imports and potential disruptions in global trade.
2. Global Supply Chain Dependence
Many of China’s economic partners are deeply integrated into its supply chains. A slowdown in China’s industrial output or disruptions caused by financial instability could lead to delays in production and rising costs globally. Countries and companies that rely heavily on Chinese manufacturing face risks of economic shocks if China’s economy falters further.
3. Export-Driven Economy at Risk
China’s role as the world’s largest exporter places additional pressure on its trading partners. As China faces internal economic struggles, it may attempt to increase exports to stabilize its economy. This can lead to trade imbalances and increased competition, potentially causing trade conflicts with major economies like the U.S. and Europe. Partners may impose protectionist measures to protect their domestic industries, escalating tensions.
4. Political and Economic Uncertainty
As China grapples with a balance sheet recession, its government may struggle to find effective policy solutions. This leads to economic uncertainty for its partners, who must navigate unpredictable shifts in Chinese policy, including changes in trade regulations or currency controls. A prolonged slowdown could destabilize global markets, making it harder for international businesses to plan long-term investments.
5. Debt and Financial Contagion Risks
China’s financial system is burdened with significant debt, particularly at the local government level. A collapse in local government finances could create a ripple effect across global markets, particularly for countries and investors heavily exposed to Chinese debt. The risk of financial contagion looms if China’s debt crisis spirals out of control.
Result (Part 1)
China’s economic instability makes it a historically dangerous partner for countries and companies deeply linked to its economy. The real estate collapse, weakened domestic demand, and the risk of global trade tensions heighten economic vulnerabilities. As China navigates its internal crisis, its partners face risks ranging from supply chain disruptions to financial shocks.
Now the historically same story
The Story of Japan’s Economic Collapse in the 1990s: From Boom to Bust
In the 1980s, Japan was riding high on the back of one of the most spectacular economic booms in modern history. It had established itself as a global economic powerhouse, with thriving industries in manufacturing, technology, and finance. Real estate prices soared, and the stock market seemed unstoppable. However, the bubble that inflated Japan's economy during this period would soon burst, leading to the "Lost Decade," a period of prolonged economic stagnation in the 1990s.
A. The Bubble Economy: 1980s Boom
In the 1980s, Japan experienced rapid economic growth, fueled by easy credit, speculative investments, and a real estate frenzy. Low interest rates encouraged borrowing, and companies and individuals alike poured money into both the stock market and real estate. Property prices surged in major cities like Tokyo, with some estimates suggesting that the land in the Imperial Palace alone was worth more than all the real estate in California.
The stock market reflected this speculative boom. The Nikkei Index, Japan’s main stock market indicator, hit an all-time high in 1989, driven by investors who believed the growth was unstoppable. During this time, Japan's economy was seen as a model for other nations, with its export-led growth, highly efficient manufacturing, and increasing technological dominance.
B. The Bubble Bursts: Early 1990s
As the 1990s began, cracks in the foundation of Japan's economic boom started to show. The Bank of Japan, concerned about overheating in the economy, raised interest rates to curb speculation. This sudden shift in monetary policy caused borrowing costs to rise, leading to a sharp decline in both stock and real estate markets.
The Nikkei Index, which had peaked at nearly 39,000 points in 1989, plummeted over the next few years, eventually losing nearly half its value. Real estate prices also collapsed, erasing trillions of dollars in wealth. Investors who had borrowed heavily to buy property and stocks now found themselves deeply in debt, with assets worth far less than they had paid.
C. The Balance Sheet Recession
The collapse of asset prices led to what economists now call a balance sheet recession. In this scenario, businesses and households, rather than spending or investing, focus on paying down debt to restore their financial health. Even though interest rates were slashed, borrowing did not increase because people were more concerned with reducing their liabilities than taking on new ones.
Japanese companies, which had borrowed heavily during the boom years, were particularly affected. Many firms were technically bankrupt, with their liabilities far exceeding their assets. Rather than investing in new projects or hiring workers, they focused on repaying debt, which significantly slowed down economic activity.
D. Government Response: Fiscal Stimulus and Monetary Policy
In response to the collapsing economy, the Japanese government implemented various fiscal stimulus packages to try to jumpstart growth. Public works projects, infrastructure spending, and tax cuts were all deployed, but the effects were short-lived. Every time the government cut back on its stimulus efforts, the economy faltered again.
The Bank of Japan lowered interest rates to nearly zero, hoping to encourage borrowing and spending, but the strategy had limited success. With businesses and households still focused on deleveraging, monetary policy alone could not stimulate growth. The problem wasn’t a lack of liquidity but a lack of demand for loans.
E. Deflation and Economic Stagnation
The 1990s became known as Japan’s "Lost Decade" due to the prolonged period of stagnation and deflation that followed the bursting of the bubble. As businesses and consumers continued to cut back on spending, prices began to fall, creating a deflationary spiral. Lower prices led to lower corporate profits, which in turn led to wage cuts and layoffs. With consumer confidence in decline, the economy struggled to grow, despite massive government intervention.
Deflation became a persistent issue. Falling prices might sound like a benefit to consumers, but in Japan's case, it caused businesses to delay investment and hiring, fearing that future profits would decline further. This perpetuated the cycle of economic weakness.
F. The Long Road to Recovery
Japan’s economy remained sluggish throughout the 1990s and into the early 2000s. While there were periods of mild recovery, the overall economic environment remained one of low growth, low inflation, and high debt. The government and the Bank of Japan attempted numerous policies, from quantitative easing to additional stimulus packages, but these measures had limited success in revitalizing the economy.
Japan's experience during the 1990s had profound effects on its economic and social structure. The country, once a symbol of unstoppable growth, became a cautionary tale of what happens when an economy built on speculative excess crashes.
G. Lessons for the World
Japan’s economic collapse in the 1990s offers valuable lessons for other countries, particularly those facing speculative bubbles. It highlights the dangers of unchecked asset inflation and the difficulties of managing an economy in a balance sheet recession. Japan’s story is a reminder that once a bubble bursts, recovery can take years or even decades, and that government intervention, while necessary, must be sustained and carefully managed.
Result: Japan's "Lost Decade" (result part 2)
The result of Japan's economic collapse in the 1990s was a prolonged period of stagnation, known as the "Lost Decade." This era is marked by deflation, slow economic growth, and widespread deleveraging by businesses and households. Japan's real estate and stock market bubbles left a legacy of financial caution that still influences the country today, as it continues to grapple with low inflation and moderate growth even decades later.
Japan’s experience stands as a critical example of how a booming economy can quickly spiral into prolonged stagnation if speculative excesses are allowed to inflate unchecked and if recovery policies are insufficiently targeted at reviving demand.
Today what happened/ing
China’s Looming Economic Challenge: Real Estate Bubble and Balance Sheet Recession
Summary: China's economy is facing a significant downturn, with its real estate sector at the center of a financial crisis that mirrors Japan's economic collapse in the 1990s. A balance sheet recession, driven by widespread debt repayment among households and businesses, threatens to undermine growth. Government action, particularly in fiscal policy, is needed to avert a deepening recession, but so far, China has been slow to respond effectively.
A. China’s Real Estate Bubble and Economic Slowdown
China's real estate sector, once a key driver of economic growth, is now in the midst of a sharp correction. As property prices fall, Chinese citizens who invested heavily in housing are seeing their wealth shrink. This has sparked a wave of debt repayment as homeowners attempt to stabilize their finances. The economic ramifications are broad, as reduced borrowing and spending weaken the overall economy. The situation bears a striking resemblance to Japan’s real estate crisis of the early 1990s, which led to a prolonged period of stagnation.
B. Understanding Balance Sheet Recession
A balance sheet recession occurs when households and businesses, instead of borrowing and investing, focus on reducing debt. This shift in behavior typically follows the bursting of an economic bubble, such as the one China is currently experiencing. Despite low interest rates and efforts to stimulate borrowing, companies and individuals prioritize debt repayment to repair their balance sheets. This deleveraging trend suppresses economic growth, as fewer businesses invest in expansion and fewer consumers spend on goods and services.
In a traditional economic recession, lower interest rates would usually encourage borrowing and stimulate growth. However, in a balance sheet recession, even zero or near-zero interest rates fail to reignite borrowing, as financial security takes precedence over profit maximization.
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C. The Role of Government in a Balance Sheet Recession
In times of a balance sheet recession, the government must step in to fill the economic void left by the private sector. With businesses and households focused on paying down debt, the only entity capable of borrowing and spending enough to maintain economic activity is the government. Fiscal stimulus becomes essential in offsetting the lack of private sector investment. However, China has been slow to implement significant fiscal policies, largely due to concerns about rising deficits, especially at the local and regional government levels.
China's central bank has attempted to address the slowdown by reducing interest rates, but this strategy has proven ineffective in the face of widespread deleveraging. Monetary policy alone cannot stimulate an economy where borrowing has ceased, making government spending the only viable solution.
D. Local Government Deficits and Economic Stagnation
China’s fiscal challenges are further compounded by the financial instability of regional and local governments. Even before the real estate bubble burst, these governments were already struggling with large deficits. Now, as the economic slowdown deepens, they are in no position to implement the kind of infrastructure projects or public spending needed to stabilize the economy. Without significant intervention from the central government, the financial strain on these local administrations could worsen, leading to a deeper recession.
E. Global Ramifications of China’s Economic Troubles
China's economic crisis has global implications. As the world’s largest exporter, China cannot simply rely on exporting its way out of recession. The global economy, particularly in the United States and Europe, would not tolerate a further increase in China's trade surplus. Any attempt by China to boost exports as a way to stabilize its economy could lead to heightened political and economic tensions with its major trading partners.
Moreover, China’s inability to export its way out of trouble is compounded by its already substantial trade surplus. Countries such as the U.S. would likely impose further trade restrictions if China were to push for greater market share abroad, a strategy that would destabilize global markets.
F. Challenges with Implementing Fiscal Policy
Despite the clear need for fiscal intervention, China's government faces a difficult balancing act. Even before the onset of the current economic troubles, China’s budget deficit was already significant, particularly in local governments. Implementing additional fiscal stimulus would further increase the deficit, a step that policymakers are reluctant to take. However, without government action, the economy risks falling into a deeper recession.
One of the key difficulties is that much of China’s debt burden is concentrated at the local level, where many governments are already bankrupt or struggling to meet their financial obligations. The central government will need to take on a larger share of the responsibility, but so far, this has been slow to materialize.
Result (part 3): An Economy at Risk of Stagnation
China’s economic slowdown, driven by a collapsing real estate market and the onset of a balance sheet recession, presents a serious threat to both domestic and global markets. As households and businesses focus on paying down debt, economic activity slows, creating the need for significant government intervention. However, China's reluctance to implement large-scale fiscal stimulus, combined with already high deficits at the local level, suggests that the country may struggle to avoid a prolonged recession.
In the absence of strong government spending, China’s economy risks further stagnation. The implications of this crisis extend beyond its borders, with global markets watching closely as the world’s second-largest economy navigates one of its most significant challenges in decades. If China does not act soon, it may face years of economic stagnation, similar to Japan’s “lost decade” after its own real estate bubble burst.
Relation of those stories
Comparing Japan's Economic Collapse in the 1990s with China’s Current Economic Situation
Both Japan's economic collapse in the 1990s and China's current economic challenges stem from speculative bubbles and are marked by significant similarities, yet each situation has its own unique aspects. Here is a detailed comparison of the two:
1. The Bubble: Real Estate and Speculation
Japan (1990s): Japan's economic boom in the 1980s was driven by speculative investments in real estate and the stock market. Property prices in cities like Tokyo reached astronomical levels, and the Nikkei Index soared, reflecting rampant speculation. The bursting of this bubble in the early 1990s led to a dramatic collapse in both stock and real estate prices, erasing trillions of dollars in wealth.
China (Present): China's current economic troubles also stem from a real estate bubble, but in this case, the problem is more focused on the housing market. For years, Chinese citizens heavily invested in property, driving up prices. Now, as property values decline, homeowners are seeing their wealth shrink, which has led to a wave of debt repayment and reduced consumer spending. Like Japan, China is also seeing a sharp drop in real estate prices, threatening the stability of its broader economy.
2. The Collapse and Immediate Impact
Japan (1990s): When the Japanese bubble burst, real estate and stock markets collapsed. The Nikkei lost half its value, and property prices plummeted. Japanese businesses and individuals, who had taken on significant debt, found themselves with assets worth far less than their liabilities. This created a balance sheet recession, where companies and households focused on paying down debt rather than borrowing or investing, causing economic growth to stagnate.
China (Present): In China, the collapse is most visible in the housing market, where declining property values have left many homeowners with properties worth far less than what they paid. As in Japan, this has triggered a wave of deleveraging, where individuals focus on reducing debt instead of spending or investing. The slowdown is compounded by falling demand for new housing and a broader economic deceleration.
3. Balance Sheet Recession
Japan (1990s): Japan’s balance sheet recession was triggered by a collapse in asset values, leading companies and individuals to focus on debt minimization rather than profit maximization. Despite low interest rates, borrowing remained stagnant, and economic activity ground to a halt. The government implemented fiscal stimulus, but growth remained weak as businesses continued to pay down debt.
China (Present): China is now experiencing a similar balance sheet recession, where homeowners and businesses are paying down debt instead of borrowing, despite historically low interest rates. Deleveraging has become widespread, with little appetite for borrowing, leading to a slowdown in both consumer spending and business investment. This has weakened economic growth, much like Japan in the 1990s.
4. Government Response: Fiscal Policy vs. Monetary Policy
Japan (1990s): In Japan, the government responded to the crisis by launching several fiscal stimulus packages aimed at boosting economic activity. The Bank of Japan also slashed interest rates, but monetary policy was largely ineffective. Despite these efforts, the economy remained sluggish as businesses and households focused on reducing debt.
China (Present): China’s central bank has also reduced interest rates, but with limited success in stimulating borrowing due to widespread deleveraging. China’s reluctance to deploy large-scale fiscal stimulus is partly due to concerns over existing government deficits, particularly at the local and regional levels. Without significant fiscal intervention, China risks further economic stagnation, similar to Japan’s experience.
5. Global Implications: Trade and Export Strategies
Japan (1990s): During its economic stagnation, Japan initially attempted to export its way out of recession. However, as the largest trade surplus nation, Japan faced significant international pressure from countries like the U.S., which accused Japan of destabilizing global trade by trying to export unemployment. This resulted in trade frictions and limited Japan’s ability to rely on exports to stimulate growth.
China (Present): China, like Japan, is the world’s largest exporter and runs a substantial trade surplus. However, it faces similar global trade tensions. Any attempt by China to increase exports to offset domestic weakness would likely meet resistance from major trading partners such as the United States and Europe, which are already wary of China’s trade practices. Thus, China cannot rely solely on exports to drive recovery without risking global conflict.
6. Differences in Debt Structure
Japan (1990s): Japan’s bubble was primarily driven by commercial real estate and corporate borrowing. The collapse in asset prices hit businesses particularly hard, and the deleveraging process involved large corporate players focusing on reducing their debts, which slowed the entire economy.
China (Present): In China, the bubble was driven largely by residential real estate. The financial strain is primarily on individual homeowners who invested heavily in property. While businesses are also affected, it is the mass of homeowners reducing spending that has a broader economic impact, leading to reduced consumer demand and weakened overall growth.
Result (part 4): Prolonged Economic Stagnation
Both Japan and China experienced the bursting of speculative bubbles that triggered balance sheet recessions, with significant impacts on their economies. Japan’s experience led to a "Lost Decade" of stagnation, where deflation, low growth, and deleveraging dominated the economy for years. Despite government efforts, recovery was slow and painful, taking decades to regain momentum.
China is currently at the early stages of a similar crisis. If the Chinese government does not implement substantial fiscal interventions, the country may face a prolonged period of economic stagnation, mirroring Japan’s lost decade. Moreover, both countries face similar global trade tensions, limiting their ability to rely on exports to escape the downturn.
In result, the comparison highlights how both Japan and China have faced speculative bubbles, balance sheet recessions, and challenges in stimulating growth through traditional fiscal and monetary policies. China now has the opportunity to learn from Japan’s experience to avoid a prolonged economic downturn, but it must act swiftly to implement the necessary policies.
Mosi opinion:
BRICS Will Brick and Payback: A Growing Economic Reality
In my opinion, the BRICS alliance (Brazil, Russia, India, China, South Africa) is facing a critical moment where its economic structure may soon become overburdened by China’s mounting financial struggles. Here's what I mean by this:
Some of new alliances: Some Arab countries, Turkiye
Final Result : BRICS Alliance Faces Increasing Debt Risks
In result, BRICS could soon be weighed down by China’s debt, forcing member nations to share the burden. As China’s financial system continues to deleverage, new and existing allies may find themselves tied to its economic fate. Countries like Russia, already weakened by war, and other BRICS members who have borrowed from China, could soon pay the price as they become part of the Chinese debt crisis. This could lead to financial instability not only for BRICS nations but for the global economy as well.
Finally: Wrong path to "New world order" by Chinese politicians
Best reference: Richard Koo