This article is first published as a tweet thread
The term "Japanification" refers to a long economic slump similar to Japan's "Lost Decade". If you're familiar with this term, you've likely heard of the "balance sheet recession," a concept coined by Taiwanese-American economist Richard Koo. It describes the aftermath of an asset bubble burst in a highly leveraged economy.
The question arises: is China on the brink of such a phase? There are compelling reasons to challenge this prediction.
First, not all asset bubbles are created equal. Japan's 1990s bubble involved property, corporate debt, and stocks, while China's recent bubble centers on the property market only.
Secondly, surprise! The Chinese stock market isn’t overvalued based on the PE ratio. Over the past decade, the Shanghai Stock Exchange's PE ratio peaked at 20 in 2015. As of 2023, SSE's PE remains below 13. This two-day-old WSJ article seems to agree with it: Yes, There Is a Bull Case for Investing in China.
Thirdly, back to the property market. A little discussed fact is that during and after the burst of Japan Inc, the Japanese property market was already fully transparent and open to foreign direct investments. This left it volatile to both demand/supply cycles and short-term hedging cycles. However, the Chinese property market has little interference from foreign direct funds. Neither the supply nor demand can be interfered with by foreign players, making the Chinese property market a pure "domestic play".
An even more interesting fourth element is the dual-track RMB peg. For those unfamiliar, in simple terms, this system acts as a cushion, if not a moat, helping China avoid the kind of economic crisis most developing countries endure when their currencies freely float against the dollar.
That brings us to the fifth reason: why Chinese corporate and local government debt is not a ticking time bomb for China's central bank. Much of this debt is held in RMB, which is not subject to the currency peg system. This means the central government can bail out Chinese companies, particularly state-owned enterprises, as well as local government debt. For China's central bank, it's akin to simply moving money from one pocket to another.
The under-discussed sixth reason is the Chinese central leadership's reluctance to ease monetary policy. The central bank has not yet fully utilized its monetary toolkit, including aggressive QE and RRR cuts.
However, as I write this essay (or tweet thread), some new policy signals indicate changes. For instance, stimulation announced and rumored for the stock market includes announced stamp duty reductions, restricting new IPO supply, and more. For the property market, first home loan requirements were suddenly relaxed in major cities overnight ("认房不认贷"). More bold easing policies are rumored although unverified as time of publishing.
By the way, why has Chinese leadership, not just Xi, been conservative with monetary policy? It's because the government has been focused on deleveraging since around 2014, when it announced Supply Side Reform. Although deemed unsuccessful so far, faith in Supply Side Reform seems only to be strengthening for the coming years. But that's perhaps a topic for another time.
Other factors are also at play. China's emerging sectors like EV are ripe for growth. Tech giants like BAT haven't posted major losses, and Huawei's Meta60 sounds promising. In contrast, Japan post-1990’s bubble burst was lost in the internet era, still struggling to catch up.
Another factor is the demographics. While China may soon lose status as the most populous nation, keep in mind Japan's population was only 1/3 of America’s; relying heavily on US consumers. The US is just 1/3 of China's population. China's consumer market, though uncertain, remains one of the most robust.
Lastly, the efficiency of a one-party system (need to say more?).
I'm sharing these discoveries not to appear bullish on the Chinese economy. In fact, it pains me to see the eroding morality in the Chinese startup and venture capital circles I know most intimately. I may report back on that front later.