China may be about to catch the Japanese disease. The consequences would be bad not only for China but for all of Asia; and also explosive politically.

As with Japan, China's leaders recognised the deflationary threat too late. They have failed to cut interest rates fast enough (real rates are about 10%) to boost domestic demand, perhaps because they fear that domestic savers will panic and seek hard-currency havens, despite an officially closed capital account. Instead, the government is relying upon additional infrastructure spending, equivalent to a combined 3.5% of GDP for this year and next, to pull the economy up. Yet there is little to suggest that a centrally mandated infrastructure splurge in China will provide much more than a short-term benefit. It will lean against the wind, but that wind, pushing back domestic demand, is a strong one.

Plenty of mainland and foreign economists are cheerier than this; they have an enduring faith in the government's ability to keep the economy growing. But China's structural problems may now be too deep-seated for the government to be able to deliver. Worried about the consequences of unemployment, or about the rising social costs (pensions, schooling, health care) that state companies used to bear, people are becoming afraid to spend—just as they have in Japan.

Several years of Japan-like slow growth, not to mention recession, would be disastrous for the welfare of ordinary Chinese. It would put China's long-term growth assumptions in serious doubt. It would threaten the legitimacy of a leadership whose claim to power is its ability to deliver growth. And it could precipitate a banking crisis that would make Japan's look like a picnic.

——China's economy entering a dangerous period of sluggish growth, The Economist, Oct 22nd 1998.