Prospective Expectation-Driven Balance Sheet Repair: An Extension of Koo's Theory and a Correction for the Chinese Context

Koo's balance sheet recession theory has become a mainstream analytical framework for explaining China's current weak domestic demand, private sector deleveraging, and persistent real estate market adjustment. However, this theory is rooted in the special historical conditions of Japan's 1990s asset hard crash, economy-wide insolvency, and passive debt repayment, with the core implicit premise that economic contraction necessarily stems from the current-period destruction of asset stock. This paper points out that directly applying this theory encounters four logical paradoxes: the asset status paradox—China has not experienced a systemic asset crash or widespread negative equity; the policy logic paradox—supply contraction policies cannot explain the simultaneous decline in both volume and price within a supply-demand framework; the demographic timing paradox—China's economic turning point is highly synchronized with the cliff-like drop in birth rates, rather than lagging behind; and the micro-behavioral paradox—Chinese households are primarily engaged in active early mortgage repayment and precautionary saving, rather than Japanese-style passive debt repayment and strategic default. Based on these paradoxes, this paper originally proposes the theory of "Prospective Expectation-Driven Balance Sheet Repair," the core proposition of which is: in the absence of a nationwide housing price crash and systemic debt defaults, the long-term irreversible signal released by the cliff-like drop in birth rates during 2020–2021 was discounted in advance by the market. This, combined with active risk-avoidance behavior triggered by institutional rule uncertainty, jointly drives the private sector to actively sell assets, curtail investment, and reduce consumption, forming a chronic, active, expectation-driven economic contraction. This paradigm is empirically supported by three pieces of evidence: the essential inversion of the China-Japan cyclical timing, the gradual revaluation characteristics of China's real estate cycle, a