is china the next japan

China

China: Not the Next Japan

April 2016

CAFE MONTHLY

“Our greatest glory is not in never falling, but in rising every time we fall.”

- Confucius

MENU OF THE MONTH

The China Observers

Chua Jie Xuan

Foo Cai Yu Inez

Lam Qi Koi

Roy Yeo Fu Qiang

Tian Chang

Table of Contents

China: The Next Japan? Our Central Theme ......................................................................................................... 1

China: A Crash in Sight Over-reliance on Credit for Economic Growth ............................................................... 2

Growth in Property Prices Similar to Levels in Japan in 1990s ...................................... 3

Matching Movements in Equity Market ........................................................................ 4

China: A Different End in Sight High Urbanization Potential to Stimulate Growth ......................................................... 5

Service Sector Growth Potential to Aid Recovery .......................................................... 6

Aging Population Drags Recovery .................................................................................. 7

Conclusion: China Not the Next Japan China Still has 2 Years to Go ........................................................................................... 8

Even If China Crashes, It will Recover ............................................................................. 8

2016 MONTHLY REPORT: CHINA Page | 1

COVER STORY

A steep increase in real estate prices coupled with a strong equity market rally in

China seem to resemble conditions not different from what Japan witnessed

before the start of the “Lost Decade”. As a result, economists have issued

warnings that China will be the next Japan. In this feature, we will examine the

arguments put forth by proponents of this, and point out how China will not

necessarily go down the same path as Japan.

China: The Next Japan?

Our Central Theme

China has come a long way and grown to be the second largest

economy in the world since Deng Xiaoping’s reforms in 1978.

However, the slowdown in economic growth and the rising debt in

the market in recent years have brought in a wave of uncertainty

over the economic health of China. Increases in asset prices and an

equity market rally that resemble conditions observed in Japan

before the lost decade have caused economists to put forth a theory

– China will be the next Japan.

As much as there is a possibility of a crash looming ahead for China,

our team believes that there is still 2 years to go. Furthermore, unlike

Japan, China will have the necessary infrastructure and policies to

recover from any possible crash.

This issue consists of two core segments: (1) indicators showing how

long it will be before China crashes, and (2) factors why we believe

China will be able to recover even if it were to crash.

Page | 2 2016 MONTHLY REPORT: CHINA

Over-reliance on Credit for Economic Growth Prior to the crash in 1990, Japan accumulated a high level of debt at

around 214%. This was the result of a loose monetary policy. Similarly,

recent monetary easing in China has caused debt in China to reach levels

similar to that of Japan prior to the crash.

Graphically, it can be seen from Figure 1 that China’s Debt to GDP ratio in

2015 is at 209% and is equivalent to that of Japan in 1989, a year before

the collapse of the Japanese asset price bubble. Drawing upon this

reference, proponents may argue that given the rising trend of China’s

debt now, it is likely that China will reach the peak of the crisis by the end

of 2016, slightly lesser than a year from now.

Figure 1: Japan vs China, Corporate and Household Debt / GDP

Comparing Japan and

China’s Debt/GDP Ratio, it

seems that a crash in China

is due to occur in 2016.

COVER STORY COVER STORY

China: A Crash in Sight

With high credit reliance, turmoil in the equity market as well as overvalued

properties, China today does seem to possess some traits similar to Japan in the

1980s. These similarities underlie proponents’ call that China is the next Japan.

We will use these indicators to project when China will head into a crash.

Figure 1: China vs Japan, Corporate and Household Debt % of GDP

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

100

140

180

220

100

140

180

220

2007 2009 2011 2013 2015

China Japan

Source: Bank For International Settlements

1 year


COVER STORY

Figure 2: China vs Japan Asset Prices


Growth in Property Prices Similar to Levels in

Japan in 1990s As evident in Figure 2, Japanese asset prices increased 60% to its peak in

1990 as a result of an expansionary monetary policy which financed real

estate development. The same trend is observed in China where the recent

interest rate cuts in 2015 contributed to a rise in housing prices. The growth

of the property bubble was further accelerated as the Chinese government

reduced property transaction taxes and cut down-payment requirements.

With reference to Figure 2, it can be deduced that China’s current 50%

growth in property prices is comparable to the situation of Japan in 1990, 1

year before the collapse of the asset price bubble. Going forward, the easing

requirements to buy property may contribute to further increases in China’s

property prices. With the upward trajectory of housing prices, China may

head into the peak of the crisis in 2017.

1982 1984 1986 1988 1990 1992

100

120

140

160

180

100

120

140

160

180

2005 2007 2009 2011 2013 2015 2017

China Housing Price Japan Land Price

1 year

Source: Thomson Reuters Datastream

Year

20

05

= 1

00

Year

19

82

= 1

00


Matching Movements in Equity Market The recent market correction in 2015 for China resembles the pattern observed

in Japan in 1988. This period is highlighted in the shaded region in Figure 3

where there is a dip in the equity market after a relatively long period of

stability. Relative to their respective base years, the period saw China rise by

130% and fall 80%, whereas Japan increased by 180% and decreased by 30%.

As such, the matching movement and pattern in the equity market seems to

show that China has another 3 years to go before it crashes, assuming that it will

crash when it rises to a similar level seen in Japan in 1990.

Figure 3: Shanghai SE Index vs Nikkei 225 Index

COVER STORY



1980 1982 1984 1986 1988 1990 1992

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

2009 2011 2013 2015 2017 2019 2021

Shanghai SE Index Nikkei 225 Index

Year

20

09

= 1

00

Year

19

80

= 1

00

3 years


COVER STORY

Favourable demographic

trends and strong growth

potential serve to kick start

China’s recovery should it

crash.

COVER STORY

Despite indications that the Chinese economy may crash, further analysis shows

why China might not be the next Japan from a recovery standpoint. Unlike Japan

which has been trapped in a recession for decades, China will have significant

potential for recovery due to structural traits different from that of Japan.

China: A Different End in Sight

High Urbanization Potential to Stimulate Growth

China’s urbanization rate today is still far below that of Japan in 1990 as

illustrated in Figure 4. At its current level of 55%, China has another 25% of

headroom to grow in terms of urbanisation to reach Japan’s level in 1990.

Such a low urbanisation rate in China represents vast potential for growth as

labour inflows into urban areas will contribute to increased consumption.

Moreover, with the lifting of Hukou restrictions which allow the relocation of

rural workers into cities, more will be able to enjoy higher wages and

education. This contributes to a higher skilled labour force and increases

production efficiency. All of the above provide opportunities for growth and

the potential to help China to recover from the recession.

Figure 4: China vs Japan Urbanisation (%)

1976 1978 1980 1982 1984 1986 1988 1990

60

65

70

75

80

20

40

60

80

100

2000 2002 2004 2006 2008 2010 2012 2014

China Japan

25%





Service Sector Growth Potential to Aid Recovery

China’s service sector remains smaller than that of Japan in 1990 as seen in

Figure 5. Compared to Japan’s service sector which made up 60% of its GDP in

1990, China’s service sector only contributes to 48% of its GDP. To reach

Japan’s level in 1990, China has another 12% to go. This provides ample room

for China’s continued growth in the service sector.

Growth in the service sector allows job creation and employment opportunities

for unskilled workers. It is also considered an indicator of economic progress.

The increasing trend highlights China’s focus of shifting labour towards the

higher value-added service sector as a key driver of future economic growth.

Figure 5: China vs Japan, % share of GDP for Service Sector

1976 1978 1980 1982 1984 1986 1988 1990

35

40

45

50

55

60

65

35

40

45

50

55

60

65

2000 2002 2004 2006 2008 2010 2012 2014

China Japan

12%




1976 1978 1980 1982 1984 1986 1988 1990

8

10

12

14

16

18

8

10

12

14

16

18

2000 2002 2004 2006 2008 2010 2012 2014

China Japan

5%

Source: The World Bank

Figure 6: China vs Japan, Dependency Ratio, Old (%)


Aging Population Drags Recovery An aging demographic has contributed to sluggish recovery for Japan since its

crash in 1990 as it poses challenges related to declining consumption levels and

a general fall in workforce productivity. Such an aging population is seen from

the rising old age dependency ratio in Japan which measures the number of

elderly people as a share of those of working age (Figure 6).

However, an analysis of Figure 6 shows that there is a gap of approximately 5%

between China’s current old age dependency ratio, and that of Japan in 1990.

The younger demographics in China imply higher consumption and productivity

levels. Moreover, with the relaxation of the one-child policy, the dependency

ratio will not likely increase at a pace as significant as that seen in Japan post-

1990.

As a result, even if China were to suffer from an economic crash today, it

remains better positioned in avoiding the deflationary spiral seen in Japan.


COVER STORY

Indicators Years to Reach Japan’s Level

Credit Situation 1

Property Valuation 1

Equity Market 3

Average 2 (Rounded up)

Even If China Crashes, It will Recover Assuming that China was to go into a recession, we believe that it will be able

to recover faster than Japan.

Factors Difference in Potential Compared to Japan’s Level in 1990

Urbanisation 25%

Service Sector Growth

12%

Aging Population 5%

Japan has largely been unable to restart its economy due to underlying

structural problems that will take years to resolve. However, given China’s

current rate of urbanisation, service sector growth, and more favourable

demographics as compared to Japan, there exists potential for China to tap

on by implementing suitable economic policies to drive growth.

Conclusion: China Not the Next Japan

China Still has 2 Years to Go Purely using Japan as a basis for comparison and assuming that the economic

crash will happen when the economic indicators reach levels seen in Japan in

1990s, our analysis shows that China will need another 2 years before it

crashes.


Contact Details

Chua Jie Xuan Foo Cai Yu Inez Lam Qi Koi Roy Yeo Fu Qiang Tian Chang

Address: Centre for Applied Financial Education (CAFE) Nanyang Business School Nanyang Technological University 50 Nanyang Avenue Singapore 639798 Tel: (65) 6790-4250

Disclaimer

This report was produced by students of the Platform-Based Learning track in Banking and Finance under the

Centre for Applied Financial Education (CAFE) at the Nanyang Business School in the Nanyang Technological

University, Singapore.

This report may not be reproduced (in whole or in part) or delivered or transmitted to any other person without

prior consent from CAFE.

This report does not constitute a personal solicitation or a recommendation to buy/sell any securities or take into

account investment objectives, financial situations, or needs of the reader.

Information and opinions contained in this report are published for reference only and are not to be relied upon

as authoritative or without the reader’s own independent verification, or taken in substitution for the exercise of

judgment by the reader.

[email protected] [email protected] [email protected] [email protected] [email protected]


REFERENCES

Blomström, Magnus. 2003. Structural Impediments to Growth in Japan.

Accessed 3 March, 2016.

http://www.nber.org/chapters/c9570.pdf.

Creehan, Sean. 2015. Why We Shouldn’t Invoke Japan’s “Lost Decade” as China’s Future. 10 August. Accessed 3 March, 2016. http://www.frbsf.org/banking/programs/asia-program/pacific-exchange-blog/why-we-shouldnt-invoke-japans-lost-decade-as-chinas-future/

Dexter Roberts, The Chinese Can’t Kick Their Savings Habit, (Bloomberg),

May 1, 2015, http://www.bloomberg.com/news/articles/2015-05-01/chinese-consumers-cling-to-saving-suppressing-spending

Economist, The. 2014. End of the golden era. 31 May. Accessed March 3,

2016. http://www.economist.com/news/finance-and-

economics/21603021-chinas-property-market-cooling-long-last-

end-golden-era.

Fortin, Aurélien. 2009. “Japan's changing labour market and how it is

affecting its growth model.” September. Accessed 3 March, 2016.

https://www.tresor.economie.gouv.fr/file/327023.

Fukao, Kyoji. 2014. The Structural Causes of Japan’s Lost Decades.


http://iao.cnrs.fr/documents/doc/Fukao2014worldklems.pdf.

Lam, Raphael W. 2015. “China’s Labor Market in the “New Normal”.” July.


https://www.imf.org/external/pubs/ft/wp/2015/wp15151.pdf.

Stephen Roach, Will China’s Shift to a Consumer-Oriented Economy Succeed, January 28, 2016, http://www.pbs.org/newshour/making-sense/will-chinas-shift-to-a-consumer-oriented-economy-succeed/

Tsutsui, W. M. (1999). Banking in Japan: Japanese banking in the high-

growth era, 1952-1973. London: Routledge. Yip, P. S. (2008). Exchange Rate Systems and Policies in Asia. World Scientific. Frankel, J. (1994). Is Japan Creating a Yen Bloc? Retrieved April 7, 2016,

is china the next japan

Documents