China is weaker than it appears and “may be entering into an asset-deflation phase” like Japan’s, says a report today by two analysts at Bank of America Merrill Lynch. China has vaulted ahead of Japan to become the world’s second-largest economy after the U.S. But like Japan, says the Merrill Lynch report, China is marked by “imbalanced growth, government stimulus, overcapacity, an overwrought housing market, and a severely under-capitalized financial system.”
The report, called “Will China Repeat Japan’s Experience?” is by Naoki Kamiyama, an equity analyst in Japan, and David Cui, a strategist in Singapore. They say that the China of 2014 resembles the Japan of 1992, when a historic real estate bubble was beginning to deflate. “In general, it appears to us that the problem facing China today may be more serious than Japan’s in the late 1980s and early 1990s,” they write.