CHINA'S NOISY RISE EVOKES ECHOES OF JAPAN CRASH Tony Jackson
Thursday, September 20, 2007
It is natural to be impressed with the way Chinese markets are shrugging off the turmoil in the West. But there is a faint, disquieting echo. Is it just me, or is this all too reminiscent of Japan 20 years ago?
Nonsense, the bulls will say. Granted, Japan sailed serenely through the Wall Street crash of 1987, only to drop off its own much steeper precipice two years later. But China is no Japan. It is vast and surging. It is the future.
This is to forget how awesome the Japan story was in the late 1980s. In world markets, the Japanese were regarded as unstoppable. “They're relentless,” said Jack Welch, of General Electric. “Make them climb a mountain, and they'll look around for a bigger one.”
Congress bayed for protection against the Japanese juggernaut. A posse of Detroit executives went to Tokyo to plead for relief from Japan's export drive. The Wall Street Journal proposed sardonically that Japan could keep the executives provided it kept sending the cars.
Meanwhile, Japan's corporate buyers prowled the world for trophies. On the US west coast, they bought chunks of the film industry. In the east, they snapped up New York's Rockefeller Center. In London, Nomura acquired and lavishly occupied the old General Post Office – “a bubble building”, one of its executives said to me sadly soon after. This newspaper sold its City headquarters to a Japanese developer and withdrew prudently to humbler quarters across the river. Today, it is taken for granted that China is unstoppable. If its industries are not yet sweeping the world, they will be shortly. And they are marching up the value chain, from toys and shoes to software and pharmaceuticals.
Chinese buyers are abroad in force, snapping up anything from IBM's personal computer business to chunks of Barclays and Blackstone. Across the western world, markets are a-twitter at the forthcoming deluge of cash from China's sovereign wealth funds.
The comparison can be pressed further. Back then, of course, investors reacted to the Japanese miracle by pushing the equity market to fantastic levels. At the end of 1989, just before the crash, the dollar value of the Japanese market was almost twice that of the US. Guess what? Today the Chinese market, if we include Hong Kong, is bigger than Japan's.
Back then, bulls of Japan argued that the Tokyo market was not as expensive as it looked, because the big companies all had large cross-holdings in each other. While the logic was a little elusive, the effect in China today is the reverse. By one estimate, half the Shanghai market's earnings growth in this year's first half came from rising share prices.
Back then, bulls would tell you the Tokyo market could only go up because Japanese savers had nowhere else to put their cash. Today we are told that because Chinese investors can only get 3.5 per cent on bank deposits, while inflation is running at 6.5 per cent, they have no alternative but to buy stocks. This fallacy is seductive, since it implies the market can logically have no ceiling. It is generally deployed as a last resort, when the fundamentals have fallen by the wayside. And whenever I meet it, the phrase “Japanese wall of money” springs to mind. In all this, I do not mean to draw direct comparisons between the two economies. They are plainly very different – indeed, the Chinese economy resembles nothing the world has ever seen. The parallels are rather in human behaviour, which in times like these sets market prices as much as the fundamentals.
It remains to be asked what the results of a Chinese market slump would be. After all, the Japanese crash was materially damaging, since real estate values also collapsed and the banks were left with a mountain of bad debts.
The snag is that we have no good data on Chinese real estate prices, nor would most people believe them if we had. As for the banks, it would be surprising if an essentially state-controlled system had mastered the techniques of commercial lending, but you never know.
It all comes back to the feel of the thing. As Charles Dumas of Lombard Street Research remarks, China is in a solipsistic bubble. And there, at least, the Japanese parallel is exact.
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