China won't end up like Japan - but it's headed for a 'grinding deceleration' with a narrow path to avoid stagnation, research firm says

• China has only a narrow path to avoid economic stagnation, according to TS Lombard.
• Its economy is likely hitting a soft bottom soon as opposed to a balance-sheet recession.

China's fate won't end up looking like that of Japan's in the 1990s, but its economy is headed for a "grinding" slowdown, with just a narrow path for policymakers to avert more serious economic pain, according to TS Lombard.

"China's property sector and growth rate more broadly are in structural decline," TS Lombard economist Rory Green said in a note on Tuesday, warning that the nation's economy was headed for "Sinification," as opposed to the Japanification that other economists have warned of.

"We define Sinification as a grinding deceleration in activity led by falling property investment and weak consumption," he later added.

Cracks have been forming in China's economy all year. The nation is being slammed by a "triple-shock" following the pandemic, Green said, which include a huge load of debt in its property sector, the risk of decoupling economic ties from the US, in addition to long-running demographic issues, with its population on track to plunge by 50% by the end of the century, according to a United Nations estimate.

Those factors have weighed heavily on economic activity. Property sales have collapsed 24% year-per year, while investment in the sector has fallen 19%, TS Lombard data shows. The nation also slipped into deflation earlier this summer for the first time since the height of the pandemic, as consumer demand fails to revive across the economy.

China is attempting to combat a slowdown with a flurry of stimulus measures -- but those are only partially offsetting the slowdown in consumption and investment, Green said, with more stimulus likely needed.

In the Sinification scenario he forecasts, China's economy is slated for 3%-4% GDP growth over the next 3-5 years. That's well-below the double-digit growth rate China has seen for much of the past 20 years -- but still better than the 1% growth rate Japan saw in the 90s.

"The prospect of a lost Chinese decade or decades is edging closer," he warned. "A hinge point is approaching' either more stimulus helps form a weak cyclical bottom or a balance-sheet recession begins in the next couple of quarters. The former is still our base case," he later added.

Other forecasters have cast similar warnings over China's economy, seeing only slim chances the nation can avoid a difficult economic slowdown. The nation is at risk of a debt deflation loop unless monetary policy is kept appropriately loose, Morgan Stanley strategists previously warned, advising the nation to keep interest rates below the real GDP growth rate.