For much of the last decade, the chorus has grown over when, and not if, China would replace the United States as the world's most influential economy, and shift the global order to the east. During the same period, China's economy has been plagued with an array of fundamental challenges, that may derail its bid to lead the world economy. On the contrary, analysts flag the possibility of Beijing entering into a downward spiral akin to what has been seen in Japan since the 1990s.
This contrarian view received a boost on Thursday, when China's stock market highlighted how much the confidence has fallen. The CSI 300, the country's benchmark index, closed 1.84% lower at 4,036.30. That put it about 20% below its June peak and in bear-market territory, after ten straight weeks of losses.
The sell-off is the latest symptom of a wider problem, as economists are increasingly asking whether the world's second-largest economy is slipping into the kind of long stagnation that Japan went through after its property and stock bubble burst in 1990. Japan's slump came to be called its “lost decades”.
A Financial Times analysis this week found that the parallels have become hard to ignore. China's total public and private debt is now about 300% of GDP, according to Capital Economics, which is close to Japanese levels. Goldman Sachs has updated a “Japanisation index” that combines economic slack, inflation and policy rates, and it shows China has scored as more Japan-like than Japan itself for each of the last five years.
What Is ‘Japanification'?
The term describes a trap that is easy to fall into and hard to escape. A burst asset bubble wipes out household wealth. Families and companies then focus on paying down debt instead of spending or investing. Prices stagnate or fall, wages flatten, and a shrinking population makes things worse. Over time, people stop expecting things to improve, and that pessimism ends up making itself come true.
China now shows several of these signs at the same time.
1. A property collapse that is still under way
Property investment fell 20.6% in January to September from a year earlier, and new construction starts dropped about 25%, according to official data. New-home prices fell month-on-month in 49 of 70 major cities in September and were lower than a year earlier in 64 of them. The FT, citing Macquarie, reported that housing starts are now 78% below their peak, a steeper fall than Japan's after its bubble burst.
2. Weak demand for loans
China's yuan loan growth slowed to a record low of 4.8% in September, and household borrowing has started to shrink outright for the first time on record. Economist Richard Koo coined the term “balance sheet recession” for Japan in the 1990s, and the same pattern is now showing up in China: people are repaying loans instead of taking new ones.
3. A bond market showing low expectations
China's 10-year government bond yield was about 1.65% this week, its lowest level in more than a year. Yields that low suggest investors expect weak growth and low inflation for years, and that they see few better places in the economy to put their money.
4. Falling prices masked by expensive oil
Headline inflation is positive for now. Consumer prices rose 0.9% in September and factory-gate prices jumped 5%, but mainly because fuel costs have risen with the conflict in the Middle East. Food prices actually fell 1.7%, and analysts say domestic demand remains weak. Restaurant price wars, with meals now sold for under Rmb10, are similar to the gyudon price war in 1990s Japan.
5. Demographics and an unhappy younger generation
China's population has shrunk for four years in a row. It fell by 3.39 million in 2025, and births dropped to 7.92 million, the fewest in decades. Japan's population started declining in 2009, while China's decline began in 2022 at a much lower level of income per person. Youth unemployment was 18% in September, the highest for that month since the current way of measuring it began in 2024.
Stock Market Telling A Familiar Story?
The two countries' markets show how long such a downturn can last. Japan's Nikkei 225 peaked at 38,915.87 on Dec. 29, 1989, and took 34 years and two months to beat that record, finally doing so in February 2024. It has since risen much further and closed at 62,907.84 on Thursday.
China's market is now in its own long wait. The Shanghai Composite hit an all-time high of 6,124 in October 2007. It closed at 3,658 on Thursday, about 40% below that peak almost 19 years later.
ALSO READ: Dragon In A Bear Hug: Three Reasons Why China's Stock Market Plunged 20% From Its Peak
Why China May Not Be Japan
Despite the uncanny similarities, there are some fundamental differences, say economists, which may ensure that China's trajectory will differ from Japan.
At the foremost is China's export prowess. The country's manufacturing sector is getting stronger, and not weaker. Exports rose 36.3% in September from a year earlier, and the trade surplus reached $938 billion in the first nine months. That puts it on course to beat last year's record of $1.2 trillion. Semiconductor exports more than doubled over the same period. Japan, in contrast, saw its share of global manufacturing fall by half between 1995 and 2010.
On concerns over real estate, Chinese officials argue that they let the property bubble deflate on purpose and are redirecting money into chips, AI and advanced manufacturing. On the other hand, Japan cut back on investment for two decades after its crash.
Analysts also point out that China still has further room to grow, as compared to Japan which reached a saturation point before its economy starting going downhill. China is still much poorer, per person, than Japan was in 1990. That leaves more room to catch up, and it has policy tools it hasn't fully used yet, such as large-scale help for households.
Furthermore, the Beijing's growth is also holding up for now. GDP grew 4.5% in the July–September quarter, ahead of forecasts and within the country's 2026 target of 4.5–5%.
The Risks That Remain
Critics say the export strength hides the problem instead of solving it. Retail sales grew just 1.1% in September, and fixed-asset investment fell 7.2% in January to September. Trading partners, especially the EU, are pushing back harder against cheap Chinese goods, which threatens the strategy of exporting China's way out of the slump.
Some economists aren't convinced the adjustment has really started. Michael Petts of the Carnegie Endowment told the FT that China “hasn't really started its adjustment yet”, because debt is still rising quickly. Investment is still about 40% of GDP, compared with about 22% on average in OECD countries. Oxford Economics does not rule out growth slowing to 2-2.5% a year over the next decade, which would make it very unlikely China overtakes the US economy any time soon.
For China, the next few years will show whether exports and a big bet on technology can do what Japan's policymakers could not. If they can't, Thursday's bear market may come to look like an early sign of a much longer downturn.
ALSO READ: AI Trade's Weak Link Isn't Chips, It's Debt: Who Is Most Exposed If Yields Keep Climbing
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.