Will China Be the Next Japan?
A tale of two housing crises: Charting the path from Tokyo's turmoil to Beijing's bubble.
The haunting specter of Japan's "Lost Decade" – that prolonged period of economic stagnation the country faced in the 1990s – is being invoked again, but this time, with its gaze set squarely on Beijing. With China's housing crisis gaining momentum, there is an increasing alarm that the world's second-largest economy might be on the precipice of its own lost decade. The parallels are certainly compelling, but so are the differences.
The Similarities to Japan's Past
To learn more about Japan’s lost decade, check out this article:
The story of Japan's Lost Decade starts with an astronomic property bubble in the 1980s. At the height of this frenzy, the Imperial Palace's grounds in Tokyo were, theoretically, worth more than all the real estate in California. When the bubble burst in the early 1990s, it sent the Japanese economy into a spiral. Corporate balance sheets bled, the banking sector was crippled, and consumers stopped spending. Despite numerous government interventions, Japan could not shake off the resultant malaise for nearly two decades.
Now, with Country Garden's recent bond troubles and the default of Evergrande last year, the specter of a similar property bubble looms large over China. According to reports, by the end of 2022, around 144,000 Chinese homebuyers may find their dream homes nothing more than mirages. Even more troubling, property prices have declined by an average of 33% among the top developers. If this trend persists, a devastating ripple effect across the Chinese economy seems probable.
The Eerie Parallels Between the Japanese and Chinese Bubbles
The narratives of Japan in the late 1980s and China of the 2020s intertwine with a series of uncanny resemblances:
The intoxication of easy credit played a significant role in both scenarios. In Japan, post-Plaza Accord, there was a deluge of cheap credit, as policymakers aimed to counteract the strengthening yen's impact on its export-led growth model. This surplus liquidity fueled the speculative fervor in both stocks and real estate. Similarly, China's post-2008 expansive monetary policy, with its easy loans and low interest rates, set the stage for ballooning debts and a burgeoning property market.
There's also the role of the banking sector and its symbiotic relationship with the spiraling bubble. Japanese banks were prolific in their lending, often with real estate as collateral, underpinning inflated asset values. This web of over-leveraging and speculative optimism mirrors China's banking dynamics, where vast amounts of loans have been channeled into real estate ventures and infrastructure projects, many of which teeter on the verge of unprofitability.
Both narratives, too, are characterized by a national belief in the invincibility of their respective markets. In Japan, there existed a pervasive sentiment that property values could only go up, a belief echoed in today's China, where real estate is often seen as a “safe haven” investment. This unfettered optimism, underpinned by cultural values and historical contexts, often blindsided many to the telltale signs of an impending downturn.
In many ways, this crisis could be even worse: The world of the 1990s was different. Japan's economic stagnation, while impactful, occurred in a global environment less interconnected than today. China's centrality to global supply chains, its role as the world's manufacturing hub, and the sheer magnitude of its consumer base means that its housing crisis could ripple across global economies in ways we've never witnessed before…
The Data Deep Dive
In a direct comparison between the scope of each country's property bubble:
Japan's property prices index peaked at nearly 180 from 1980 to 1989, whereas China's touched 200 from 2010 to 2020 from, indicating an even larger potential bubble.
Household debt in Japan was approximately 60% of GDP in the early 1990s. As of 2021, China's household debt stands at nearly 62% of its GDP.
Youth unemployment, a telltale sign of economic distress, spiked in China to over 20% in 2021, reminiscent of Japan's youth unemployment woes in the 1990s.
How China’s Bubble Contrasts Japan’s
Despite the similarities, it's essential to acknowledge the differences in scale and scope. At the market's peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all land in the United States.
In contrast, China's housing market, though enormous and of grave concern, hasn't reached such ludicrous valuations.
A Different Economy, A Different Time
China's economy, unlike Japan's in the 1990s, is undergoing a transformation. As the global manufacturing hub, China's economic implications are deeper and more interconnected. The "Made in China 2025" strategy indicates a shift from being a global factory to becoming a global innovator, focusing on high-tech fields like robotics, aerospace, and clean-energy cars.
The demographic challenges are also different. While Japan was already grappling with a rapidly aging population in the late 80s, China’s demographic shift isn’t as severe, yet.
Moreover, Japan's response to its crisis was often criticized for being too little, too late. The Bank of Japan’s hesitance in slashing interest rates post the bubble burst is a case in point. On the contrary, Chinese policymakers have displayed a penchant for swift and assertive interventionism, as evinced by the rapid rate cuts and infrastructural stimuli in recent times. The Chinese government can also benefit from the lessons of Japan’s economic history, offering insights into potential pitfalls and recovery strategies.
Furthermore, China's Belt and Road Initiative, aiming to connect Asia, Europe, and Africa, presents a new dimension. Even though the initiative has slowed down, it is still estimated to involve $4-8 trillion investments spread across continents, presents Beijing with an external growth lever that Tokyo never had in its arsenal.
The Chinese Conundrum
China’s situation, however, differs from Japan’s in several significant ways:
Economic Maturity: Japan was a mature economy when its bubble burst, with limited avenues for rapid growth. China, still developing, has more potential for high growth rates, provided it can steer clear of prolonged economic shocks.
Population Dynamics: China's demographic issues, though pressing, are not as acute as Japan's were. The sheer size of China's population offers a buffer that Japan did not possess.
Policy Lessons: Having witnessed Japan's tribulations, Chinese policymakers have the advantage of hindsight. While challenges are substantial, the strategy can be informed by past missteps.
China's Belt and Road Initiative: The BRI imitative provides Beijing with external avenues for economic growth and diversification, a lever of stimulus Japan lacked in the 1980s.
Conclusion: The Bubble Echoes, Yet Differs from Japan's Past
The temptation to juxtapose China’s current economic tremors with Japan’s Lost Decade is both alluring and dangerous. The parallels are there: high savings rates, which for Japan touched 25% in the early 1990s and for China reached about 37% in 2021, can both shield and stymie economic resilience. There are demographic echoes too, with both nations graying, albeit with China still having a more substantial youthful workforce buffer.
Yet, divergences are profound. China’s continued urbanization potential and the globe-spanning Belt and Road Initiative lend it external growth avenues Tokyo never possessed. Moreover, while Japan was often criticized for tentative policy responses, Beijing has exhibited swifter economic interventions, suggesting a keen awareness of historical pitfalls.
Nonetheless, challenges like China's soaring corporate debt, nearly 160% of its GDP in 2020, and the opacity of its financial systems are dark clouds on the horizon.
In essence, while China might reverberate with some of Japan’s past notes, it dances to a complex, multifaceted tune of its own. As it navigates this precarious juncture, one message is clear: the world watches with bated breath, not just as passive observers, but as stakeholders in the unfolding narrative of the world's second-largest economy. The hope is for China to learn from history, but not be ensnared by it.
One asset missing for China: it doesn’t have any of the cultural influence and attractiveness that Japan had in the 1980s and still has today. In Eastern Europe where I was born, we had just one TV channel, and the number of Japan-imported content on that TV channel was equal to that of the US-imported: I grew up watching anime and Taiga dramas. I then lived in France, and the Japanese cultural prestige there is even more insane. Anyone who has visited France’s yearly «Japan Expo» can attest. I know that culture doesn’t necessarily transfer into economics, but it’s still a factor. I mean, you’re much more receptive to the economical deals of a country you grew up admiring.
Very good article. Although I lived through Japan's bubble and burst, I'd forgotten just how insane property values had gotten. Japan's combined real estate values were 4X the US! How did investors in Japan not realize a tsunami correction was coming?
A really good insight you made is how China's bubble is nowhere near where Japan peaked. That's a helpful perspective.