China is becoming Japan — with worse imbalances and better cards

Few Chinese economists have pushed back against the “Japanification” thesis as consistently as Yao Yang, former dean of Peking University’s National School of Development. So it matters that he now admits he is “not that confident anymore about opposing that view” based on a recent podcast. He is right to hesitate. China does resemble Japan after its bubble burst, but its domestic imbalances are larger, while its external position is considerably stronger. That combination makes a prolonged Japanese-style stagnation more likely, not less.

Start with the symptoms. Chinese growth has fallen from 14% in 2007 to around 5% today, at least officially, and nominal growth has run below real growth because the GDP deflator has turned negative. Since the property bubble burst in mid-2021, producer prices have been falling almost without interruption. The policy response has mirrored that of Tokyo’s in the 1990s. The People’s Bank of China, like the Bank of Japan before it, has eased slowly and reluctantly, keeping real rates high while the economy runs below potential. Fiscal support has been timid, partly because the debt sits with local governments. The 10 trillion RMB (US$ 1.4 trillion) package of November 2024 was mostly a swap of hidden debt held by local government financing vehicles into official bonds — useful for financial stability, but not stimulus.

Japan’s zombie problem in a different guise

Yao’s diagnosis is that the centre has squeezed local finances too hard, and that tighter political discipline has left officials unwilling to take initiative. This is Japan’s zombie problem in a different guise. In Tokyo, banks under the Ministry of Finance’s convoy system kept rolling over loans to insolvent developers and starved productive firms of credit. In China, it is local governments and their financing vehicles that can neither invest, nor pay, nor fail.

The underlying mechanism is the same in both countries: savings far in excess of what domestic investment can productively absorb, channelled at artificially low interest rates into real estate and infrastructure. But China’s imbalance is bigger. Its savings rate has stayed around 45% of GDP from the 2000s into the early 2020s; 

Savings imbalance, trade surplus

Japan’s was around 33-35% at the equivalent stage and dropped below 30% within a decade. Household consumption in China remains below 40% of GDP, whereas Japanese private consumption never fell much below half of GDP even at the height of its bubble. Japan, slowly and painfully, shifted towards consumption-led growth. China has barely moved, because the drivers of precautionary saving — thin pensions, limited health coverage and urban services still tied to hukou status — remain largely in place.

Excess savings have to go somewhere, and China’s go abroad as goods. Its trade surplus exceeded US$ 1 trillion in 2025. Japan, by contrast, became the world’s largest net external creditor and now earns its current account surplus mainly from income on foreign assets. China’s surplus is almost entirely trade, with negligible net investment income. That leaves it far more exposed to protectionism than Japan ever was.

So far, the comparison looks worse for China. But three differences cut the other way.

China dealt a stronger hand with weaker US

Meanwhile, the US is politically polarised at home and has raised tariffs on allies as well as rivals, which weakens its ability to build a coalition. American containment of China is much broader than it was of Japan, covering technology and security rather than trade alone. But China is being pursued by a country whose social and political cohesion is weaker than in the 1980s. Yao expects emotion in Washington eventually to give way to rational calculation and a more stable equilibrium; China’s capacity to retaliate is one reason he may be right.

Diversification to the Global South

Second, China has an outlet Japan never had. In the mid-1980s, close to 40% of Japanese exports went to the US. China has spent a decade diversifying towards the Global South, backed by Belt and Road lending, and its sales to ASEAN alone now exceed those to the US. Southeast Asia, the Middle East, Africa and Latin America absorb a growing share of Chinese electric vehicles, machinery and steel. This is economic leverage, but also political leverage of a kind that Tokyo, which largely followed Washington’s lead in global governance, never sought.

Third, China is closer to the technological frontier. Japan in the 1980s excelled in manufacturing — memory chips, cars, consumer electronics — but trailed the US in the computing and software that defined the next era. China today competes with the US in AI models, batteries, electric vehicles, solar, telecom equipment and drones, a breadth Japan never reached. Even under stringent US export controls, it is narrowing the gap in semiconductors.

What would drive domestic reform?

None of these strengths, however, fixes the domestic problem. IMF research finds that Chinese total factor productivity growth has declined during the slowdown, and frontier breakthroughs coexist with ruinous price wars in precisely those sectors. Worse, the strengths may entrench the imbalance. Japan rebalanced partly because Washington forced it to. A China that faces no Plaza Accord and can sell its surplus to the Global South faces much less pressure to raise household consumption. External strength becomes a substitute for domestic reform.

All in all, how much China will resemble Japan will not only depend on whether China is ready to introduce the structural reforms needed to avoid that fate, but also on the future of the US as global hegemon and whether the Global South continues to support China’s rise instead of fearing it.

Related: The unbalancing of Chinese rebalancing | Top economist Yang Yao: Can Beijing save China’s economy from real estate and debt?