In Japan’s footsteps?

China’s economy looks a lot like Japan’s did in 1990 – and that should serve as a warning.

Could China become the next Japan? asks Bloomberg. Two recent reports by Oxford Economics and HSBC Holdings Plc say China is in a situation that is similar to where Japan stood in 1990 and warn that the world's second most important economy should beware of repeating Japan's policy mistakes.

The similarities are important enough to warrant caution. In broad strokes, both countries enjoyed decades of accelerated debt-fueled growth that prompted steep increases in real estate prices and huge market rallies. China's stock market rally over the past year was one of the biggest ever.

Between 1985 and 1990, economic growth in Japan averaged 5% yearly, the country attracted 8% of world imports, represented 12% of global GDP and 57% of Asia Pacific's GDP. China now pulls in 10% of world imports, holds 11.5% of world GDP and 38% of Asia Pacific's GDP.

Of course, many countries enjoyed explosive growth patterns without necessarily sinking like Japan into a prolonged deflationary recession. But other similarities between the two countries point to possible bad news for China.

Like Japan, though less acutely, China is suffering from an aging population. It is also in the grip of chronic overinvestment, high private sector debt and irrationally exuberant asset markets.

One of the most troubling similarities lies in the two countries’ epic stock rallies and crashes. In China, after surging 150% in one year, the Shanghai Composite Index fell into a deep correction, not totally over yet, that pulverized more than US$4 trillion in value.

Oxford Economics and HSBC both recognize that China has learned some lessons from Japan, but, advises HSBC, "there is more work to be done."