For all the focus on how Russia’s economy is in trouble, isolated and battered by western sanctions, China, its most important ally, faces serious tremors as well. No other major country is showing deeper sinkholes of economic trouble.

After building for months, financial stress emanating from the Chinese property sector has blown out to unprecedented levels in recent weeks, destabilising an already brittle economy and making it less likely that Beijing will aggressively support Russia’s invasion of Ukraine.

Unsure whether the troubled property developers are just illiquid and temporarily short on cash, or insolvent and unlikely to survive, big Chinese lenders are wary of extending new loans. Finding it difficult to raise money at home, the developers have been forced to borrow abroad at exorbitant rates. The spread between high-yield bonds in the overseas Chinese market and government bonds is now at a staggering 3,000 basis points, a level last seen during in the 2008 financial crisis.

Property is critical to growth in China. About 25 per cent of gross domestic product and 40 per cent of bank assets in China are tied to the property market, where estimates of the effective default rate on high-yield bonds are close to 25 per cent, a record high. Dependence on foreign capital is high, but in February foreigners sold off China’s local currency government bonds at an unprecedented pace, twice the previous monthly high.

These uncertainties echo the doubts that haunted the US financial system in 2008 when lenders could not tell which big borrowers would live through the crisis and credit markets froze. Chinese policymakers seem aware that they cannot afford confrontations that further destabilize financial conditions.

Liu He, the top economic adviser to Chinese President Xi Jinping, recently tried to calm the markets by addressing concerns about how the government is handling problems in the property sector, the regulation of big tech platforms, a surge in Covid-19 cases and more. His comments brought some relief to financial markets, but the systemic risk in the property sector remains high.

The fact that credit growth in China continues to be weak despite central bank efforts to stimulate the economy may be an early-stage sign of Japanification. With its rising debt, shrinking population and market turmoil, China looks increasingly like Japan did in the 1990s. That’s when Japan entered a