While attention has been focused on how Russia’s economy is struggling, isolated and hit by Western sanctions, its most important ally, China, is also facing serious shocks. No other major country has shown deeper economic distress.

After several months of construction, financial pressure came from Chinese real estate industry It has exploded to unprecedented levels in recent weeks, shaking an already fragile economy and reducing the likelihood that Beijing will actively support Russia’s invasion of Ukraine.

Not sure if Troubled real estate developer Large Chinese banks are wary of issuing new loans because of illiquidity and a temporary lack of cash, or because they are insolvent and unlikely to survive. Developers are finding it difficult to raise funds at home and are forced to borrow abroad at exorbitant rates. The spread between high-yield bonds and government bonds in overseas Chinese markets is now at a staggering 3,000 basis points, levels last seen during the 2008 financial crisis.

property is vital to growth in China. About 25% of China’s GDP and 40% of bank assets are tied to the real estate market, and the effective default rate for high-yield bonds is estimated to be close to 25%, a record high. Foreign dependence is high, but foreigners sold China’s local-currency government bonds at an unprecedented pace in February, double the previous month’s high.

The uncertainties echo doubts that plagued the U.S. financial system in 2008, when lenders couldn’t tell which big borrowers would survive the crisis and credit markets froze. Chinese policymakers seem to realize that they cannot afford a confrontation that would further destabilize financial conditions.

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

China’s credit growth remains weak despite central bank efforts to stimulate the economy, which could be an early sign of Japanification. With rising debt, shrinking populations and market volatility, China is becoming more and more like Japan Did it in the 1990s. That’s when Japan entered a deflationary trap because lenders were reluctant to lend no matter how much liquidity the central bank injected into the system.

Over the past 30 years, China’s total debt has tripled to nearly 300% of GDP, a level Japan reached around 1990, the beginning of the so-called “lost decades.” China’s working-age population began to shrink in 2015, a step beyond Japan’s stagnation in the mid-1990s.

Fewer workers means slower growth. Looking back at data from 200 countries over the past 60 years, my research found that 38 of the working-age populations in one country declined over a full 10 years. The average GDP growth in these countries was only 1.5%, exceeding 6% in only three cases. All three countries are small countries in exceptional circumstances, such as recovering from a crisis.

Robust economic growth is almost unheard of when the working-age population shrinks, making it unlikely that Beijing will meet its growth target of close to 6 percent, especially as productivity is also falling.

Chinese state capitalism was successful when the state retreated, but now it is advancing.The government is introducing aggressive new regulations and tough measures for high-productivity industries such as tech control the epidemic. Beijing’s campaign to limit Covid-19 cases to zero has protected large parts of the population from infection, but has also left them vulnerable to new variants. Now, these variants are proliferating, sparking new lockdowns under the “zero coronavirus” policy. Economic activity, including factory output and retail sales, looks set to contract this month and next.

In a new Cold War, therefore, the West faces a more fragile and possibly less unified eastern front than many global observers believe. With an economy one-tenth the size of China’s, Russia is in a state of unparalleled financial crisis, largely cut off from the rest of the world. But to a widely underestimated degree, China is also at risk if it takes any steps to remove foreign capital and could do enormous damage to its fragile economy. That means Beijing may think twice before offering generous support to Russia or ignoring Western sanctions for the war.

The author is the chairman of Rockefeller International