China’s economy is at a crossroads, with discussions arising about whether it will head towards “Japanese-style” or “Soviet-style” economic models. Recently, a third possibility has emerged: the concept of “Soviet-style Japaneseization.” The latest analysis suggests that China could potentially face both the low growth, weak demand, and aging population characteristic of Japan, alongside resource misallocation resulting from increased state intervention.
The idea of “Japaneseization” is not new. The Chinese economy, with its real estate bubble, aging population, mounting debts, and weak consumption, has drawn comparisons to Japan in the aftermath of the burst of the bubble economy in the 1990s. The Chief Economist of Nomura Research Institute, Gu Chaoming, has long analyzed Japan’s economic stagnation through the lens of “balance sheet recession,” and in recent years, has extended this analysis to China.
In an interview with the South China Morning Post in June of this year, Gu Chaoming pointed out various similarities between China and Japan, noting their robust tech industries and vast markets may not necessarily shield China from facing economic challenges similar to those encountered by Japan.
Academic research continues to explore the possibility of China’s “Japaneseization.” Research published in 2025 and 2026 highlights the similarities in oversupply and deflationary pressures faced by China and Japan. However, differences in their growth models and policy responses suggest that even if China experiences a Japanese-style stagnation, it may not necessarily follow the same economic trajectory as Japan.
On the other hand, another analytical path refers to “Sovietization.” Wu Junhua, a director at the Japan Research Institute, introduced the concept of the “Sovietization trap” in 2024. She argues that the primary risk China faces is not Japanese-style stagnation but rather a resurgence of state control over the economy. The expansion of state-owned enterprises, the shrinking space for private enterprises, and government support for inefficient enterprises could create a situation akin to the “soft budget constraints” observed in the former Soviet Union, further impacting resource allocation efficiency.
Liu Mengjun, a researcher at the First Institute of China Institute of Economic Research, stated in a lecture at Political University on October 6 that from the “Fifteenth Five-Year Plan” to the 21st Party Congress of the CCP, the likelihood of China steering towards a “Soviet-style Japaneseization” is higher than achieving a “rebalancing trajectory of moderate growth.”
Liu Mengjun believes that the core constraint facing the current Chinese economy is not just insufficient growth momentum or external pressures but the gradual integration of “security first” into institutional arrangements. Under this policy orientation, he argues that goals such as technological autonomy and industrial security may further concentrate resources and increase the degree of government intervention in the economy.
He proposed three observation indicators, including whether the investment gap is converging, if the share of consumption in GDP continues to rise, and whether capacity utilization rates can recover. Liu Mengjun stated that if market mechanisms gradually return, property rights are better protected, and the share of household sector income increases, China may still move towards a “rebalancing trajectory of moderate growth.” However, if the security-oriented approach continues to diminish market functions, it could lead to a long-term stagnation characterized by “high control and low efficiency.”