A plunge in new corporate borrowing in China combined with Chinese households preferring to repay debt rather than expand borrowing saw bank loans in China shrink last month for the first time since July 2005. That deepened China’s years-long battle with weak credit demand, as a property slump spurs caution on buying homes and expanding investment.
This has raised fears that China’s first bank loan contraction in nearly two decades could send the world’s No. 2 economy toward a “balance sheet recession” similar to that in Japan decades ago.
Then a decision by consumers and businesses to pay down debt following a real estate collapse in Japan was a hallmark of Japan’s stumble into decades of deflation beginning in the 1990s. Economists are now debating whether China is also facing a similar “balance-sheet recession,” a concept Richard Koo, chief economist at Nomura Research, used to explain Japan’s “lost years.”
Other economic indicators also point to a deterioration in domestic demand this year, and put President Xi Jinping’s annual growth target of about 5% under in danger.
Core inflation, which strips out volatile food and energy costs, rose just 0.4% in July, the least since January. That came after all-items inflation declined for five straight quarters, in the longest slide since 1999. Data due Thursday are expected to show sluggish retail sales remain. A key gauge of Chinese services activity that includes the retail industry is on the brink of contraction for the first time since last year in July.
