Open Questions | What must China do to avoid a Japan-type recession? Economist Richard Koo adds up why ‘the Chinese situation is far more serious’

With China’s never-before-seen levels of economic upheaval, Koo warns ‘the consequences could be dire’ if a so-called balance-sheet recession takes hold

Koo’s theories influenced Western policy after the global financial crisis, and now he has strong advice for Chinese policymakers and disillusioned young people

Reading Time:12 minutes

Why you can trust SCMP

99+

Frank Chenin Shanghai

Published: 6:00am, 20 May 2024Updated: 11:57am, 21 May 2024

Richard Koo, chief economist at the Nomura Research Institute, has advised several Japanese prime ministers on economic issues. He is known for elaborating on the notion of a “balance-sheet recession” and explaining how it led to Japan’s so-called Great Recession. This interview first appeared in SCMP Plus. For other interviews in the Open Questions series, click here.

Whereas a typical recession is considered to be a natural result of fluctuations in the business cycle, a balance-sheet recession is characterised by high levels of private-sector debt that lead to increased saving, which in turn results in an economic slowdown – because of reduced household consumption and declining business investment.

While much of the developed world is tackling elevated inflation, China’s consumer prices have been rising by less that 1 per cent every month for more than a year as consumers save their money and as many businesses wait to see if the government will introduce major stimulus measures before expanding investment.

Ahead of any such moves, Koo spoke with reporter Frank Chen about the Chinese economy, troubles it faces, lessons that can be gleaned from Japan’s missteps, and how Beijing should formulate its response and policy mix.

Mr Koo, in the midst of economic uncertainties fuelled by high levels of indebtedness and a real estate crisis – two potential causes of what you deem a balance-sheet recession – what are the risks that China might be facing such a predicament?

I have been invited to speak on numerous occasions [in mainland China] and have participated in some policy debates. A lot of economists worry that China may slip into a balance-sheet recession, but there are also other views out there.

Even though China’s first-quarter GDP growth came out to 5.3 per cent, many people remain depressed, not knowing whether manufacturing-led growth [can be sustained] when trade tensions remain so high.

SCMP Series

Open Questions – SCMP interviews with global opinion leaders

[ 32 of 39 ]