It is more than 30 years since Tokyo began inflating a property and stock market bubble, as fears grow that Beijing faces a similar fate.
Leo Lewis Tom Mitchell and Yuan Yang report: There are few things studied as closely by the Chinese Communist party as how to avoid the fate of its Soviet counterpart. In an internal meeting after he assumed power in 2012, President Xi Jinping said no one in the Soviet Union had been “man enough” to stand up to Mikhail Gorbachev and glasnost.
But for Mr Xi another historical event from the same era may warrant more immediate attention. It is just over 30 years since Japan began inflating a property and stock market bubble whose implosion ravaged public confidence, cowed corporations and scarred an economy for decades. China’s priority today is to avoid that fate.
It is not a new concern for Beijing. In 2010, as China’s overall indebtedness was approaching 200 per cent of gross domestic product, Mr Xi, then the country’s vice-president, asked scholars at the Central Party School to research the subject, according to two Chinese academics familiar with his request. A subsequent paper outlined some of the lessons of the Japanese bubble, including the need for Beijing to raise awareness of financial risks, safeguard “economic sovereignty” and not give in to pressure to change its currency policy.
Seven years on, China’s total debt is 250 per cent of GDP and climbing, officials are trying to rein in sky-high real estate prices and the government is still grappling with the aftermath of a stock market bubble that burst in 2015. Mr Xi last month warned the country’s leaders of the need to “safeguard financial security”.
But how great is the risk of China turning Japanese? Does China, the world’s second-biggest economy in 2017, run the risk of repeating the fate of what was the world’s second-biggest economy in 1989 — Japanese-style “lost decades?”. If Japan’s fate were to befall its giant neighbour, the consequences would be devastating for the global economy. China provides 40 per cent of its annual growth. China also buys just over 20 per cent of US exports, the same percentage as Japan in the mid-1980s.
Goldman Sachs’ Naohiko Baba and other analysts suggest that there are lessons for Beijing to learn from Japan’s bubble experience, when laid out against spookily similar reference points ranging from corporate debt levels to average white-collar commuting times in China. Yet others, including Andy Rothman, an investment strategist at Matthews Asia, insist that there are far more differences than similarities. He says the only real value of the comparisons “is to calm people down”.
A short answer — and one often favoured by both foreign investors with billions of dollars at stake and the Chinese state with 1.4bn people — is that there is more to be gained from taking the bubble risk seriously than from assuming that this time it is different. China has already hit various milestones that recall Japan in its late 1980s pomp. Some, such as the non-financial corporate debt-to-GDP ratio reaching similar levels of about 155 per cent, are technical. Others are more frivolous: Yasuda Kasai, the Japanese insurance company, paying $40m for Van Gogh’s “Sunflowers” in 1987; and Chinese billionaire Liu Yiqian’s 2015 purchase of a Modigliani painting for $170m.
To many observers, comparisons of bubble-like economic behaviour have always seemed within easy reach. Both countries have shown themselves capable of spasms of asset inflation with similarly boom-and-bust shaped price charts. And both have paid handsomely for overseas assets — Mitsubishi Estate paid $900m for 51 per cent of New York’s Rockefeller Center in 1989 and CC Land shelled out a record £1.15bn for London’s Cheesegrater building earlier this year, just one of the deals that has featured in record overseas spending by Chinese groups.
Japan 1980s v China now
1. Most prominent overseas corporate purchase
Japan Sony paid $3.4bn for Columbia Pictures in 1989
China ChemChina’s pending purchase of Syngenta for $43bn
Analysts are particularly intrigued by the similarities between “zaitech”, the financial engineering techniques used to boost non-operating profits that fuelled Japanese non-financial corporations’ speculative financial investment, and the Chinese equivalents that include wealth management products and trusts.
And if the mark of a real bubble is that it spills into unusual assets, look no further than the spring crop price of Old Banzhang — generally regarded as the finest of Pu’er teas. It has soared almost 90 per cent over the past year to Rmb15,000 ($2,174) a kilo, making it four times more expensive, by weight, than silver. In 1987, a similar cocktail of ostentation and speculative money propelled the membership fee of Japan’s Koganei Country Club golf course to $3.5m.
The comparisons have felt more compelling as the warnings of a China bubble — or a concoction of inter-related bubbles — have intensified over the past four years. “China has halved its growth rate and doubled its debt over the past eight years,” says Fraser Howie, an expert on the country’s financial system. “It’s not a great correlation.”
Yet there are some very specific points where the comparisons fail. Economic historians date the start of Japan’s bubble economy to September 1985 and the Plaza Accord agreement in New York that gave a green light to the depreciation of the dollar, paving the way for the market to take control. The yen strengthened from ¥240 against the dollar to ¥120 three years later. China, in contrast, carefully manages its currency and regularly cracks down on speculative behaviour. As it demonstrated in July 2015 when it controversially stepped in to arrest declines on the stock market, the Chinese state has a formidable arsenal of weaponry. That is unlikely to change … (read more)