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Richard Koo has been one of my favorite macro thinkers. I have always believed that his thoery on balance sheet recession will prove to be extremely relevant for China one day. Yesterday he gave an extraordinary speech on China's Japanification risk, below are the main takeaways:
1. China is likely to enter a painful balance sheet recession that may take many years to recover.
2. China should not waste time on monetary policy and structural reforms. Instead, it should concentrate its efforts on fiscal stimulus to keep the economy running.
2. China should not waste time on monetary policy and structural reforms. Instead, it should concentrate its efforts on fiscal stimulus to keep the economy running.
3. What's particularly unnvering is that the Chinese corporate sector has already stopped borrowing since 2016, even before the bubble burst (nonfinancial corporate debt as % of GDP has stopped growing).
4. Koo is confused and intrigued by the phenomenon in No.3...
4. Koo is confused and intrigued by the phenomenon in No.3...
...(I think a lot has to do with China's supply-side structural reforms initiated in late 2015 whose main goal is to deleverage and reduce excess capacity).
5. Chinese growth since 2016 has in large part been driven by government spending given the retreat of corporate borrowing
5. Chinese growth since 2016 has in large part been driven by government spending given the retreat of corporate borrowing
6. Chinese gov. has to further leverage up despite an already elevated fiscal deficit.
7. The property slowdown has exacerbated China's macro malaise. Koo recommends Beijing to expand fiscal stimulus to complete all unfinished property projects (this is in fact one of the...
7. The property slowdown has exacerbated China's macro malaise. Koo recommends Beijing to expand fiscal stimulus to complete all unfinished property projects (this is in fact one of the...
...items in the rumored stimulus package).
8. Japan's population started to contract in 2009, 19 years after the bubble burst. In contrast, China's population has already started to decline.
9. Challenges facing China seem more severe than those facing Japan in the 1990s.
8. Japan's population started to contract in 2009, 19 years after the bubble burst. In contrast, China's population has already started to decline.
9. Challenges facing China seem more severe than those facing Japan in the 1990s.
10. Japanese corporates do not need to worry too much about regulatory uncertainties.
11. Koo is particularly worried about the lack of support to Chinese households during the three years of implementing zero-COVID-19 policy. Being forced to dip into savings...
11. Koo is particularly worried about the lack of support to Chinese households during the three years of implementing zero-COVID-19 policy. Being forced to dip into savings...
...Chinese households are now rebuilding their savings at the same time, which contributes to domestic demand weakness.
12. Chinese policymakers need to make the right decisions as this will be the last chance for the country to cross the high-income threshold.
12. Chinese policymakers need to make the right decisions as this will be the last chance for the country to cross the high-income threshold.
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