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In a new article for the Brookings Institution, Yuanchen Yang of the International Monetary Fund and I highlight striking parallels between today’s China and Japan in the 1990s, particularly in the residential and commercial property sectors and related infrastructure. In both cases, a speculative boom was followed by a crash, leaving behind a huge oversupply of properties that could take years to clear. China is currently in the middle of this process.
Remarkably, China has built more square metres of residential floor space per capita than the UK or France, even though it remains a far poorer country. Its road and rail networks are on a par with those in the world’s most developed countries, and in many respects they surpass those of the US.
Yet the Chinese economy is deeply unbalanced – it is like a bodybuilder who has only built up his torso. Consumption – the main driver of economic growth in developed countries – remains weak. In eastern China, key cities are quite capable of competing with their western counterparts, but in many smaller towns and villages – where at least half of the Chinese population lives – the quality of life falls to a level somewhere between that of Latin America and South Asia.
There are now fears that, with its property bubble having burst, China will never escape the so-called middle-income trap. When the property crisis hit Japan, it was already a very wealthy country: in terms of per capita income, it rivalled the US. Thirty years on, per capita income in Japan is closer to that of Italy, which, in turn, is lower than that of Mississippi – the poorest state in the US. Meanwhile, China today is a long way from the level of wealth Japan enjoyed in the early 1990s.
Inequality in China is not as much of a problem as it is in the West
Amid automation and the roll-out of AI, even the most dynamic segments of China’s most dynamic sectors are failing to create enough jobs. The youth unemployment situation is so dire that the authorities have stopped publishing these statistics on a regular basis. Even under the best circumstances, it would be difficult for the economy to find a replacement for these sectors, which are in decline: property and infrastructure. As Yan and I have shown, taking into account both direct and indirect effects, they account for almost a third of total demand.
But it would be a mistake to assume that the crisis in China’s property market will inevitably rob the country of its ability to compete – whether geopolitically or economically. If you speak to businesspeople or attend technology conferences, you will hear that China’s economy is dominant and innovative. As China is not a democracy, the country’s leadership can allow dynamic technology and export sectors to flourish even whilst the rest of the economy takes decades to recover from the consequences of over-construction. It is not difficult to imagine how 450 million Chinese could prosper in a dynamic economy driven by technology and industry, whilst the remaining 950 million might have to make do with a much lower standard of living.
In Western democracies, such inequality has led to overwhelming demands for income redistribution, and European countries are already well aware of this. But in China, none of this is inevitable, particularly when the government is convinced that national security and the country’s global role depend on strengthening cutting-edge sectors. Moreover, 450 million people is still more than the entire population of the US, and roughly equal to the population of the EU.
How likely all this is to happen, of course, remains to be seen. Since Xi Jinping became President of the People’s Republic of China in 2013, the Communist Party has paid close attention to the issue of regional inequality. However, the economic forces concentrating all activity in major centres, as well as a strong desire to demonstrate power on the international stage, may ultimately prevail over the need to reduce inequality.
Political stability keeps the crisis at bay
The great economic historian Angus Maddison argued in the late 1960s that (contrary to the view of many economists, including Paul Samuelson) the USSR would never be able to fully catch up with
the US. Yet, thanks to its rich scientific traditions, the USSR was still able to compete at the cutting edge of technology and achieve military parity.
One of the main differences between the USSR and China is that China is doing its utmost to integrate with the US in the fields of trade and science. Despite the trade war initiated by US President Donald Trump, it is clear that today’s challenges – from climate change to the loss of control over AI – cannot be resolved without broad cooperation between the two superpowers.
So, however paralysing the crisis in China’s property market may be, and despite the fact that a construction glut is likely to hamper the country’s economic growth in the coming years, its dynamic core will continue to thrive – as long as the country remains politically stable and resists the imperial temptations that cause strain.
Kenneth Rogoff
, former Chief Economist of the International Monetary Fund, is now a professor of economics and public policy at Harvard University, winner of the 2011 Deutsche Bank Prize in Financial Economics, and co-author (with Carmen Reinhart) of the book *This Time Is Different: Eight Centuries of Financial Folly’ (Princeton University Press, 2011), and author of *Our Dollar, Your Problem* (Yale University Press, 2025).
©: Project Syndicate, 2026.
This story was translated with the assistance of artificial intelligence.The translation was also reviewed by the Logos Press editorial team.
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