Does China face a lost decade?

“Ever since the Chinese housing bubble burst,” said Richard Koo of the Nomura Research Institute in a recent talk, “I’ve been getting tons of calls from Chinese journalists, economists, investors and sometimes policymakers asking me, ‘Are we going the way of Japan?’”Mr Koo is a good person to ask: he has devoted his career to studying the aftermath of financial excess. When the American economy’s recovery from the first Gulf war faltered in 1991, his then boss at the New York Federal Reserve, Edward Frydl, began to worry about an overhang of debt and commercial property. This was “feeding a pervasive financial and economic conservatism among businesses and consumers”, Frydl argued. Demand for credit was subdued, because firms were “directing their efforts towards balance-sheet restructuring”. To describe these strains, he coined the term “balance-sheet recession”.