Echoes of Japan's bubble era in China's red-hot market

BEIJING • China is turning Japanese. That is the increasingly held view of observers comparing China's frenzied real-estate market with the epic bust that more than two decades ago hobbled one of its biggest economic rivals.

While the two scenarios are not a carbon copy, similarities between China's record credit boom in recent years and Japan's bubble era have been noted by a number of economists and investors. Now, those voices are being heard more often - even within China. 

Professor Huang Yiping of Peking University, who advises China's central bank, warned last Saturday about leverage that continues to climb, saying the top risk is more investment generating less growth. "That's exactly the story that unfolded in Japan." 

The worry is that of China repeating Japan's mistake of not reining in excess credit and shutting down insolvent borrowers fast enough, exacting longer-term damage to growth in the world's No. 2 economy. With potential expansion rates coming down across developed nations, the global pain would be magnified.

Mr Russell Jones, who had a front-row seat working as an analyst in 1990s Japan, said: "What really troubles me is that this extended real-estate bull market has gone hand-in-hand with an extended period of rapid credit growth, debt accumulation and some questionable practices on the part of both lenders and borrowers."

What is triggering concern is a surge in total debt since 2008 to 2.5 times the gross domestic product, as the authorities unleashed cheap bank loans to shore up China's expansion. Now, much of the credit is finding its way into property - helping to fuel a 33 per cent surge in housing prices in big cities from a year ago.

Meantime, regulators have been slow to force banks to recognise bad loans and to shut zombie companies. "Japan's experience suggests that the regulator should pay more attention to the capital bubble risk," said  chief researcher Chen Gong of Anbound Consulting.

One big advantage for China over 1990s Japan is that it is at a less-advanced level of development. China's urbanisation rate reached 53 per cent in 2013, compared to Japan's peak of around 77 per cent in the late 1980s. Said Asian Development Bank's Mr Peter Morgan, who worked as an economist in 1990s Japan: "Japan's economy was already at a much more mature stage, so the possibility of growing out of the bubble crash through a policy of forbearance was not possible."

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A version of this article appeared in the print edition of The Straits Times on September 30, 2016, with the headline 'Echoes of Japan's bubble era in China's red-hot market'. Print Edition | Subscribe