The record surge in Chinese banks’ bad loans is a financial Rorschach test if ever there were one. The Rorschach test analyses subjects’ varying interpretations of ink blots. While some may see – say – a bull, others may see a bear.

Those who believe President Xi Jinping is boldly pushing ahead with deleveraging will see the $27 billion jump in non-performing loans in the second quarter as a bullish rather than a bearish signal. Granted, things will look grave as CEOs cop to the magnitude of dodgy assets, but through this prism, banks are becoming more transparent by reclassifying debt that is delinquent for more than 90 days.

Bears will see the rise to $285 billion by the end of June as a setback for Xiconomics. To skeptics, it’s a warning sign that authorities are claiming to curb excesses while, under the radar, prodding lenders to extend new loans likely to go bad.

Tokyo’s old playbook

Who’s right? Let’s allow Japan to answer this most impactful of economic questions. Through the prism of Tokyo’s long experience, the bears have it. Xi’s government, after all, is reading right from the Japan Inc playbook.

After Japan’s bubble economy imploded around 1990, bureaucrats fell into a decade-plus cycle of one-step-forward-two-steps-back on deleveraging efforts. The pattern: Tokyo would get serious about reducing debt levels and then, at the first sign of slower gross domestic product or market fallout, reopen the credit spigot. Close, reopen, repeat.

It was only about 2002-2003 that then-Prime Minister Junichiro Koizumi prodded banks to write down bad loans. The costs of that dozen or so years of dithering are still being calculated today. Glacial and unsteady clean-up efforts explain why the Bank of Japan is still holding interest rates below zero. And why, after 18 years of toying with quantitative easing, Tokyo is barely halfway to 2% inflation.

Finally, foot-dragging during the 1990s explains why CEOs remain so reluctant to share the spoils of today’s stimulus with workers. Epic BOJ easing and some corporate governance tweaks are boosting returns on equity and the Nikkei Stock Average. But trickle-down myths were disproved in the 1980s, leaving households hearing about great times while seeing largely static pay slips.

Trumping discipline

Xi wants to break a cycle with which Japan is still grappling. Granted, the timing seems terrible, as Donald Trump’s escalating trade war imperils China’s $12 trillion economy. So far, the US president has slapped taxes on steel (25%) and aluminum (10%) and 25% on $50 billion of Chinese imports. Trump threatens to go as high as $500 billion and impose 25% tariffs on car imports.

And so, Xi’s two-year crackdown on shadow-banking is taking a backseat to GDP – again.

In the weeks since Trump took direct aim at Beijing’s export engine, Xi rolled out fresh fiscal stimulus and tax cuts. The People’s Bank of China, meantime, is prodding banks to up lending and easing capital requirements.

Easier credit means it’s now cheaper for mainland banks to borrow from one another than from the central bank. They also mean local-government leaders have greater latitude to borrow anew. It’s troubling, then, that roughly 80% of the jump in bad loans last quarter was among rural commercial institutions. Declines in capital adequacy ratios, though notable throughout China, are most pronounced among smaller banks.

Over the weekend, the China Banking and Insurance Regulatory Commission implored banks and insurance companies to boost funding to help support the real economy. At the same time, pressure on state-owned enterprises to reduce excesses are being scaled back.

“As Chinese policymakers turn their focus to easing policy and stabilizing the economy, their aggressive targets for deleveraging state-owned enterprises are likely to suffer,” says Thomas Gatley of Gavekal Research.

The bottom line, Gatley says, is that “the government will still demand central SOEs show some increased discipline in borrowing and investment, but not so much that it damages growth or other policy priorities.”

And therein lies the Japan-like threat to China’s future as a balanced, vibrant economy. Rorschach tests aside, Xi is running into an inconvenient financial truth: the more he prioritizes short-term GDP gain over pain, the more he prolongs an inevitable Chinese reckoning.

We’ve seen this movie before. It won’t end any better for Beijing than it did for Tokyo.