Fairfax is running with some quotes from BofAML:
“In general, it appears to us that the problem facing China today may be more serious than Japan’s,” the report said. “We chose 2014 to be year zero because there are strong signs that the house cycle in China is tipping over.”
Japan experienced remarkable growth in the second half of the 20th century to become the world’s second-largest economy but derailed in the early 1990s. It is now mired in high inflation, low growth and significant government debt.
“If our assessment is correct, then banks, developers and building materials should start to underperform significantly reasonable soon,” the report said.
That’s one weird assessment of what happened to Japan. Japan came a-cropper owing to a property bubble that blew up the banks and a subsequent failure to recognise the losses stalled lending which combined with aging demographics and a phenomenal entitlement culture to derail total factor productivity growth. The nation then sank into deflation.
China faces the same reckoning in its banks and it will not be helped by its similar demographic profile:
However, it also has one big advantage. China is still poor and backward and has very low capital intensity per worker. In short, it has oodles of latent productivity growth to unleash if it can get its policies right. That will mean doing all of the things that the Xi Jinping regime has been talking about with structural reform: breaking SOEs, reducing wasteful investment, shifting banks away from stimulus and towards higher return investments, moving up the value chain, interest rate and currency liberalisation, so on and so forth.
I’m quite hopeful China can keep growing at reasonable rates (3-4%) long into the century. The catch is, to do so, it must kill the wasteful investment monster that Australia feeds upon.