Will the Chinese economy repeat the mistakes of Japan?
It has been 30 years since Japan’s real estate and stock market bubbles began to inflate. The bursting of that bubble has severely damaged public confidence, frightened companies, and left decades of trauma to the Japanese economy. Now, China’s top priority is to avoid a similar fate.
Seven years have passed, and China’s total debt is now equivalent to 250% of GDP, and it is still rising. Officials are trying to control extremely high housing prices. The government is still working to resolve the subsequent effects of the bursting of the stock market bubble in 2015. Xi Jinping warned in April that the Chinese leadership needs to "maintain financial security."
How big is the risk of China becoming like Japan? Is it possible for China, the world's second largest economy in 2017, to repeat the fate of the world's second largest economy in 1989-experiencing the Japanese "lost decade"? If Japan’s fate falls on its huge neighbors, it will have a catastrophic impact on the global economy. China contributes 40% of the annual global economic growth. In addition, China's share of total US exports is slightly more than 20%, the same as Japan in the mid-1980s.
Naohiko Baba of Goldman Sachs and other analysts believe that Beijing can learn some lessons from Japan’s bubble experience. That round of bubbles showed a weirdly similar reference point to China now. From the company Debt level to average commuting time of white-collar workers. Yet others, such as Andy Rothman, investment strategist at Matthews Asia, insist that the differences between the two countries far outweigh the similarities. Luo Fuwan said that the only real value of these comparisons "is to calm people down."
To put it simply, it is more beneficial to take the bubble risk seriously than assuming that China is different from Japan. This answer is often affirmed by both foreign investors and the Chinese government, which governs 1.4 billion people. China has reached a number of milestones that are reminiscent of Japan in the late 1980s.
Some of them are technical. For example, the ratio of non-financial company debt to GDP has reached a similar level of about 155%. There are also some marginal indicators: Japanese insurance company Yasuda Kasai bought Van Gogh's painting Sunflowers for US$40 million in 1987; Chinese billionaire Liu Yiqian spent US$170 million for it in 2015 A painting by Modigliani.
To many observers, the comparison of bubble-like economic behavior always seems easy. Both countries will experience intermittent asset inflation and alternating boom and bust price curves. Both countries spend high prices on overseas assets—Mitsubishi Estate spent $900 million in 1989 to buy 51% of the Rockefeller Center in New York, and CC Land spent $900 million on innovation earlier this year. The record 1.15 billion pound acquisition of the "Cheesegrater" building in London is just one example of a record number of overseas acquisitions by a Chinese company.
Japan in the 1980s vs. China today
1. The most famous overseas company acquisition
Japan's Sony (Sony) acquired Columbia Pictures for US$3.4 billion in 1989, and ChemChina plans to acquire Syngenta for US$43 billion.
Analysts are particularly concerned about the "zaitech" of Japanese companies-the use of financial engineering technology to increase non-operating profits, which stimulated speculative financial investment by Japanese non-financial companies-and China's fund management practices including wealth management products and trusts Interested in the similarities.
If the sign of a real bubble is that the bubble overflows into an unusual asset class, just look at the price of Laobanzhangchun tea, which is generally considered the top Pu'er tea. The price of this tea has risen by nearly 90% in the past year to RMB 15,000 per kilogram, which is four times the price of silver by weight. In 1987, a similar combination of ostentation and speculative currencies boosted membership fees for the Koganei Country Club golf course in Japan to $3.5 million.
Over the past four years, as warnings about the possibility of a bubble—or a series of interconnected bubbles—increase in China, these comparisons feel more convincing. “In the past eight years, China’s growth rate has halved, but its debt has doubled,” said Fraser Howie, an expert on China’s financial system. “This is not a good correlation.”
However, there are some very clear cases where the comparison fails. Economic historians believe that Japan’s bubble economy began with the Plaza Accord signed in New York in September 1985, which gave the green light to the depreciation of the U.S. dollar and paved the way for market dominance. Three years later, the yen-dollar exchange rate rose from 240 yen per dollar to 120 yen per dollar. In contrast, China carefully manages the renminbi exchange rate and cracks down on speculation from time to time. As demonstrated in July 2015 when the controversial entry intervention to prevent the stock market from falling, the Chinese government has a daunting “ammunition depot”. This situation is unlikely to change.
2. Buying land overseas
In October 1989, Mitsubishi Estate acquired Rockefeller Center for US$900 million. In 2014, China's Anbang acquired the Waldorf Astoria Hotel in New York for nearly US$2 billion.
Another obvious difference is the ability of the two countries to recover after a sharp drop in house prices. When Japan’s housing prices plummeted in the early 1990s, it was disastrous because Japan lacked an economic engine and could not get out of trouble through economic growth, but China may have such an engine. In addition, Christopher Wood, an equity strategist at CLSA, said that as far as top-down economic planning is concerned, China is still trying something that Japan has never imagined to do, that is, starting from an export-led model. Shift to a consumer-led model.
The third difference between China's current situation and Japan's past is the unique nature of China's one-party government. Two-thirds of corporate debts are owed by state-owned enterprises to state-owned banks. As Larry Hu and Jerry Peng of Macquarie Securities pointed out last year: “China’s debt is basically what one government entity owes to another government entity. In this case, normal credit analysis Will fail because the Chinese government can restructure debt within the system."
But China's debt has also grown much faster. According to data compiled by Steve Keen, a professor at Kingston University in the United Kingdom, the ratio of private sector debt to economic output in Japan has nearly doubled from 125% in 1970 to 1995 220% of it took 25 years. The ratio of China's private sector debt to GDP has soared from 115% to 210% in the past 9 years.
Eswar Prasad, a Chinese finance expert at Cornell University, said: “China cannot escape all economic laws, but it is truly unique in many ways.”
3. Eye-catching overseas art purchases
In May 1990, Ryoei Saito of Daishowa Paper purchased "Portrait of Dr. Gachet" by Vincent van Gogh for US$82.5 million. ).
China's Liu Yiqian bought Amedeo Modigliani's "Nu couché" (Nude Woman Lying on the Side) for US$170 million in 2015.
However, when many asset classes—from ginseng to copper—have begun to show signs of bubbles, Chinese officials are uneasy. The same is true for investors who are attracted to the Chinese market by China’s continued economic growth. They are always paying attention to similar alarms, especially because Japan’s real estate and stock market speculation in the late 1980s clearly marked the end of the country’s era of rapid growth. Martin Schulz, a senior economist at the Fujitsu Research Institute, said that Japan’s bubble not only ended badly, but it also left a “scar” that was clearly visible after 25 years. In order to keep the overall economy running.
Japan’s cleanup of the financial crisis after the bubble burst-due to its stubborn reluctance to trigger corporate bankruptcies and mass layoffs, and the painful delay of the cleanup until around 2005-taught China a lesson to let the latter understand if its own banks What not to do when the industry system faces a similar crisis.
Credit Suisse chief Japanese economist Hiromichi Shirakawa believes that the response of the Chinese authorities after the bubble burst will be more important than whether there is a bubble in China. This is where China is most worthy of learning from Japan. He said: "The biggest challenge after the bubble burst is to restore people's confidence in banks. If you don't clean up some banks, confidence will not be restored."
At the psychological level, the three-fold increase in the market value of the Japanese stock market between 1985 and 1989 is exactly the same as that of the modern Chinese stock market: asset appreciation is intertwined with a deepening sense of national rise.
4. Number of outbound tourists (% of total population)
In 1989, there were 9.66 million outbound tourists from Japan, accounting for 7.85% of the total population. In 2016, the number of Chinese outbound tourists was 122 million, accounting for 8.56% of the total population.
"The bubble is the euphoric end of a long period of prosperity," said Peter Tasker, a fund manager and author of Japanese economic history. "At first, people had a reasonable optimism, and then it evolved into a feeling of no upper limit... All kinds of investors want to participate. People become rejoicing for the country. Japan is a whole bubble-stock market and real estate Simultaneous expansion. This euphoria is not only reflected in the economic and financial aspects, but also in the social and political aspects."
Hiromi Shirakawa claimed that the confidence of China and Japan came from overcoming the initially discouraging threats. Japan overcame the "oil crisis" of rising oil prices in the early 1980s, and China overcame the 2008 global financial crisis. Impact.
Hiromi Shirakawa said: "However, there are differences between the two. In Japan, the Plaza Accord (and a strong yen) has allowed the Bank of Japan to maintain long-term easing policies. Banks are under pressure and they have taken huge risks. In China Confidence comes from the idea that we have attracted a huge flow of funds from abroad, and this situation will last forever."
Nevertheless, the Chinese government is fully aware of this financial risk. As a government adviser said, it is "a major factor that may cause a shipwreck."
5. Economy-what the experts say
Japan ‘Japan is an entire bubble-stocks and real estate are inflating at the same time. This euphoria is not only reflected in the economic and financial aspects, but also in the social and political aspects’-Peter Tasker
China ‘China’s growth rate has been halved in the past eight years, but its debt has doubled. This is not a good correlation’-Hou Wei, a writer who pays attention to China
Schultz said: "The Chinese are paying attention to the demographic structure, because now they recognize the problems that Japan did not recognize at the time — no one recognized it at the time. From Japan, we learned that when the demographic structure changes, growth will How soon will it stop."
In Japan and China, stock market valuations almost peaked at the same time as their demographic dividend. Goldman Sachs’ Baba Naohiko said this may mean that “the stock market has a tendency to over-extrapolate the good times of the dividend period in the last few years before the bubble peaks.”
As some people recognize the high similarity between the expansion of the Japanese bubble and the current situation in China, the focus has shifted to whether China is approaching the same turning point as Japan in the early 1990s. Recently, Moody's downgraded China's sovereign credit rating to the same A1 level as Japan, and mentioned that the reason for this was China's large and growing debt burden. However, the rating agency also raised its outlook for the Chinese economy and expects its growth potential to slow to 5% by 2022. This result will be far better than the sudden collapse and years of economic stagnation experienced by Japan.
6. GDP per capita
Japan 1989, USD 23,472
China 2015, US$8069
In China and Japan, bubble behavior has profoundly changed the lives of countless people. When the real estate and stock market bubbles in Japan were near their peak, the cost of living in Japanese cities exceeded the affordability of ordinary wage earners. By 1989, the price of a 75-square-meter mid-range apartment 90 minutes commute from central Tokyo cost 8.5 times the average salary of a white-collar worker. Thirty years later, China is witnessing a more dramatic scene in its capital. The average price of a 100-square-meter apartment in Beijing is RMB 5 million, which is more than 50 times the average annual income of local residents.
Analysts said that the way the two governments deal with this issue makes this comparison particularly important. In 1989, Yasushi Mieno became the governor of the Bank of Japan-at that time, the Nikkei 225 Stock Average was two weeks away from reaching its all-time high of 38,915 points. At the beginning of taking office, Mie Yeyasu condemned the rising housing prices and the long commuting time. Today, many people believe that Mie Yeyao's move triggered the subsequent market crash.
To a certain extent, China seems to remember Mie Yeyao’s experience and is very cautious in using words like “contain” growth instead of compressing the bubble-China’s bubble has turned tens of millions of citizens into Millions of dollars worth
Rich man. However, China is carefully weighing this aspect. The Chinese government has a clear understanding of its vulnerability. As Xi Jinping has recently warned, "Houses are for living, not for speculation."