Kenya and China have increasingly improved relations since the turn of the century. The Chinese economy has since the 1980s grown in leaps and bounds, such that today China is the second largest economy in the world. However, a report by two analysts at Bank of America Merrill Lynch suggests that the Chinese economy may be headed for a slow down like the Japanese Economy in the 1990s.

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.

Japan’s lost decade of the 1990s came about when the Bank of Japan began raising interest rates in 1989 to prick a real-estate bubble. Higher interest rates coupled with a global economic downturn caused real estate values to plummet. Properties became worth less than the loans on them. Lenders, not wanting to acknowledge losses, kept extending fresh credit to property owners so they could pay interest on old loans. The economy slumped.

“Up until now, China has largely repeated Japan’s missteps,” Kamiyama and Cui write. Like Japan, China was overly dependent on exports, and the government resorted to stimulus when export demand fell in the financial crisis. That inflated an asset bubble, which China is seeking to deflate with tighter monetary policy. Now, they write, “the property market may be tipping over”—i.e., prices may be starting to fall. Bad debt is mounting. While the level of non-performing loans in commercial banks still isn’t high, it increased more in the first half of 2014 than in all of 2013.

[caption id="" align="aligncenter" width="620"] A Chinese investor looks at prices of shares at a stock brokerage house in Fuyang city, east China's Zhejiang province on Aug.28. (Photograph by Imaginechina via AP Photo).[/caption]

Chinese leaders still haven’t wrapped their heads around the need to recapitalize the financial system on a massive scale, and China probably won’t get back on a growth path until they do, Kamiyama and Cui say. “We suspect that a key reason behind the slow action is that the new leaders are still consolidating their power,” they say.

“If this assessment is correct,” write Kamiyama and Cui, “we will unlikely see a resolution to the long-overdue bad debt recognition and financial system recap issue until the political dust settles. Unfortunately for the market, this appears to be at least a year or two away.”

China is Kenya's second largest source of imports this year. Data from the Kenya National Bureaus of Statistics (KNBS) indicates that in the seven months to July 2014, Kenya imported products worth KES  117.72 billion from China. This was second only to India's KES 155.26  billion. The goods imported from China included heavy machinery, electronics, textiles and various home gadgets.

The question is, if there is a slow down in China, will it affect its trading partner Kenya? To read the full article on the analysts report click here.