APL (Ajiken Power Lunch)

Thursday, 21st of October, 12:00 to 1:15 p.m.

IDE-JETRO C23 Meeting Room 　

Background

• In China and Korea, housing prices and household debt have risen rapidly since the early 2000s until 2021.
• China and Korea are facing a serious economic contraction in 2023, which is closely related to the rapid cooling of the real estate market.
• This report evaluates the risk that housing prices and economic growth pushed up by debt will end in a similar way to the collapse of Japan's bubble in 1990, that is, the risk of Japanification of the Chinese and Korean economies.
• Japanification has three characteristics: the rapid collapse of the real estate bubble, population aging, and deflation.
• Therefore, this report evaluates the Chinese and Korean economies on (1) the possibility of a rapid collapse of the real estate bubble, (2) population aging, and (3) the possibility of deflation.
• I then suggest a policy direction so that the Chinese and Korean economies do not follow the same path that Japan followed for the past 30 years.

Key results

• The situations in China and Korea are both much more serious than those in Japan just before 1990.
• In particular, the excessive increase in speculative demand for real estate and construction over the past few years, the resulting excessive rise in housing prices relative to income, and the rate of increase in household debt are more serious than in Japan in 1990.
• In addition, the proportion of the elderly population aged 65 or older in China and Korea is 14% and 18%, respectively, as of 2022, which is higher than Japan's 12% in 1990, and their populations are aging faster than Japan.
• China's real GDP growth rate has continued to decline since the global financial crisis in 2008, and Korea's real GDP growth rate has continued to decline since the 1997 foreign exchange crisis, which is in contrast to Japan's continuously increasing growth rate in the 1980s.
• When comparing the situations in China and Korea, the severity of the two countries differs depending on the indicators.
• In China, the oversupply of housing is greater than in Korea, and there are concerns about excessive local government debt, while in Korea, household debt is not only much higher than in China, but also much higher than in Japan in 1990.
• Accordingly, China and Korea are likely to fall into a balance sheet recession due to weakening growth potential due to population aging and rapid increase in household debt.
• In the worst case, there is a possibility that China and Korea may follow the path of Japan's three lost decades, followed by a sudden bursting of the real estate price bubble.

Policy response direction

• Both China and Korea must reverse the rapidly declining total fertility rate and at least slow down the pace of population aging.
• In addition, through orderly restructuring of the real estate sector, productive resources excessively concentrated in the construction sector should be converted into facility investment and R&D investment, while reducing the size of household debt (Korea) or reducing the rate of increase in household debt (China).
• In the short term, both China and Korea must manage to prevent the spread of bankruptcies in the construction industry and a systemic crisis in the financial sector due to the sudden collapse of the housing market bubble.
• In addition, there is a need to compensate for the economic contraction caused by the fall in housing prices and the decrease in consumption during the deleveraging process by expanding government spending.
• In addition, a micro-financial support policy is needed for marginal households that go bankrupt due to the decline in housing prices and deleveraging.

Dr Hyun-Hoon Lee (Kangwon National University)

Ian Coxhead