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China bubble trouble risks missing lessons from Japan crash

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China is turning Japanese.

[HONG KONG] China is turning Japanese.

That's 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 aren't a carbon copy, similarities between China's record credit boom in recent years and Japan's bubble era have been made at various times by a number of economists and investors. Now, those voices are being heard more often - even within China. 

Huang Yiping, a Peking University professor who advises China's central bank, warned Saturday about leverage that continues to climb, saying that the top risk is more and more investment generates less growth.

Market voices on:

"That's exactly the story that unfolded in Japan." 

The worry is that China repeats Japan's mistake of not reining in excess credit and shutting down insolvent borrowers quickly 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.

"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," said Russell Jones, who had a front-row seat working as an analyst in 1990s Japan during that country's demise.

Mr Jones, now a London-based partner at the Llewellyn Consulting research group, says of China that "this potentially poisonous cocktail of price, credit and prudential disequilibria is indeed very redolent of Japan during its bubble years of the 1980s".

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

Meantime, regulators have been slow to force banks to recognise bad loans and to shut zombie companies. The government has put off a string of corporate defaults this year in an effort to sustain confidence.

'Rushing' In

"Japan's experience suggests that the regulator should pay more attention to the capital bubble risk," said Chen Gong, chief researcher at Beijing-based Anbound Consulting, which bills itself as the biggest independent strategic think tank in China. Mr Chen called on China's policy makers to "prevent that capital from rushing into the housing market".

The dominance of state-owned lenders and developers in the property market would leave the government and taxpayers on the hook for soured loans, raising the risk of a fiscal crisis, Mr Chen says.

Hardly a week goes by without a warning that China is stoking a new bubble only a year after a US$5 trillion stock market crash that rocked policy makers. Curbs to cool demand have struggled for traction, and Chinese media outlets carry reports of panic buying.

A commentary published by a WeChat account affiliated to the People's Daily, the Communist Party's mouthpiece, on Monday said the real-estate boom is leading couples to divorce, as a move to pay less property-related taxes. It also said companies risk losing competitiveness as they focus on gaining from real estate rather than focusing on their own industry.

One example of a company benefiting from property: Nanjing Putian Telecommunication-B, a loss-making telecommunication equipment manufacturer, which is selling two apartments in the heart of Beijing's school district to shore up its balance sheet.

The value of the residences is estimated to have risen more than 10-fold since the firm bought them in 2004. At least 73 listed companies said they're planning to sell or have sold properties to shore up cash, according to a Guangdong-based newspaper.

"I am big on the parallels," said Roy Smith, the New York University academic who as a banker in 1990 anticipated Japan's decline. Japan's market crash "led to a financial crisis that they never recovered from. China probably faces a debt-led financial crisis too, which could have significant consequences," he said.

One big advantage for China over 1990s Japan is that it's at a less-advanced level of development - meaning there's still room to reflate the economy if there's a financial bust.

China's urbanisation rate reached 53 per cent in 2013, a far cry still from Japan's peak of around 77 per cent in the late 1980s. China is estimated to have another 150 million migrants headed for the cities before the urbanisation rate reaches 80 per cent, underpinning construction for years to come.

Japan Difference

"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," said Peter Morgan, a senior consultant at the Asian Development Bank who worked as an economist in 1990s Japan.

Also, China's property market isn't uniform, with major areas of weakness along with regions that flash bubble signs. Even so, economy-wide measures underscore the concerns of many. An early-warning indicator of financial crises compiled by the Bank for International Settlements - the excess credit relative to GDP compared with the long-run trend - hit a record in the first quarter.

"China's policy makers are behind the curve," said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong.

Though they "have studied the Japanese experience extensively, it remains to be seen whether they have drawn the right policy lessons."

Still Buying

Wherever the chips fall, some buyers are confident the government will bail them out no matter what.

Jasmine Sheng, who works at a foreign bank in Shanghai, found herself having to compromise earlier this year on her plans to move to more upscale digs in China's financial capital after selling her dated apartment last year. In May, she ended up shelling out an extra 2.2 million yuan (S$448,685) over the proceeds from her old place, for a flat that, though 20 square metres bigger, was more than a quarter-century old, and in the same area.

"I just don't think home prices in Shanghai will fall in the near future," said Ms Sheng, 35.

"Even when a time comes that it's about to fall, the government will do everything it can to support it."