ALL THE WEAKNESSES OF JAPAN WITH NONE OF THE STRENGTHS:

Although China's remarkable growth after the post-Mao reforms reflected the release of enormous resources, both capital, and labor, inefficient state enterprises survived, in part because they provided politically important employment. As would be expected, they have remained a major economic drag. Now further reform, once promised by Xi, is unlikely: his government views parastatals as an essential tool for reasserting party control over economic actors.

Commercial discrimination and abuse have turned many foreign investors against what was once seen as illimitable markets likely to yield inevitable profits. The Xi government's continuing rigid COVID-lockdown policy, along with rising wages, Chinese government restrictions, and U.S. political pressure, also are encouraging businesses to rethink the PRC. Overall, U.S. investor confidence in China is at record lows. Although there so far has been no exodus of firms from the PRC, they are less likely to make ambitious plans for the future.

China is heavily indebted, a problem exacerbated by continuing COVID lockdowns. The latter also is exacerbating youth unemployment, the impact of which concerns families as well as young adults. An increasing number of disillusioned younger workers are adopting attitudes of "lying flat" and "let it rot," downgrading ambitions and reducing efforts.

The New York Times interviewed a 25-year-old who was "among a small but growing group of Chinese who are looking to the exits as China's pandemic controls drag into their third year. Many are middle-class or wealthy Shanghai residents who have been trapped for nearly two months by a citywide lockdown that has battered the economy and limited access to food and medicine. Some ... have ties overseas and worry that China's door to the world is closing. Others are disheartened by heightened government censorship and surveillance, which the pandemic has aggravated."

The PRC's property bubble is not new but is another significant economic weakness, one long promoted by Chinese government policy. Indeed, the country is notorious for its "ghost cities." The ongoing crisis has greatly affected urban households, two-thirds of whose wealth is in property, and the middle class, as many property buyers pay mortgages on unfinished homes. Indeed, some buyers have joined mortgage strikes, further destabilizing the real estate market.

This decline is likely to intensify. Warned the Council on Foreign Relation's Brad Setser: "China's real estate crisis poses financial risks, but it is ultimately a crisis of economic growth. Since the development and construction of new property is estimated to drive over a quarter of the country's current economic activity, it is not difficult to see how a temporary downturn in the property market could promote a prolonged economic slump."

Analysts have even begun speculating on China's resemblance to Japan in the 1990s when a real estate collapse contributed to the infamous "lost decade." State banks, many already saddled with significant bad debts, are suffering as the real estate market slows. In fact, Chinese regulators have ordered banks to provide continued financing to troubled developers to complete ongoing projects, further undermining already overburdened financial institutions.

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