Japan's economy is now trapped in a vicious cycle that was caused by a weakening labour market and falling property prices, as well as a slowdown in investment, manufacturing, and consumption.

These factors, according to Barclays analysts, have raised worries about a potential balance-sheet recession a la Japan, which poses serious negative risks to China's GDP projections.

Even with 4.8% growth predicted, things will not improve until stronger and more coordinated policy actions are taken to stabilise the situation.

The downturn in the Chinese economy is being made worse by a number of interconnected problems the country has been facing. The activity data for July 2024 confirms a disappointing start to the third quarter, with retail sales staying muted, property investment continuing to decline, and industrial output growth slowing.

Regarding investments, Fixed Asset Investment (FAI) growth has not met expectations; in July, it reached a nine-month low of 2% year over year. The weaker manufacturing and worsening real estate investment have caused this downturn, which has only been somewhat countered by a tiny increase in infrastructure investment.

The July statistics further highlighted the deflationary forces in the economy by showing a continuous fall in private credit demand as well as a negative GDP deflator for the sixth consecutive quarter.

One of the key drivers of China's economy, the real estate industry, is still stuck in a protracted downturn. Housing activity is still declining even with the regulatory steps to stabilise the market that was announced in May 2024.

In July, real estate investment fell by 10.8% year over year, while new home sales fell by 15.4% year over year, exacerbating the decline seen in the preceding months.

Furthermore, August saw a significant decline in the market for new home sales in thirty major cities, suggesting that the correction in the housing market is far from complete.

China's labour market has also begun to deteriorate, as seen by the increase in the urban jobless rate to 5.2% in July. The weakening consumer confidence is a result of the tightening labour market, as seen by the modest rise in retail sales.

In spite of government initiatives to encourage car purchases, auto sales have declined for the seventh consecutive month. Furthermore, the continued decline in retail sales linked to real estate has resulted in a recession in the housing market, which has a negative impact on total consumption.

China's economy has deeper structural problems that are reflected in the current economic crises, which go beyond simple cyclical ones. Household balance sheets have been severely undermined by the burst housing bubble, which has set off a deleveraging process that may take ten years or longer to complete.

There is not enough demand for borrowing, either for consumption or real estate acquisitions, even with historically low interest rates. This deleveraging suggests that China may undergo an extended period of economic stagnation, similar to what happened to the United States and Japan during their respective financial crises.

(Sources: investing.com, reuters.com)