Thursday, August 23, 2012

Bank of Japan :China bubble in 'danger zone'


China risks a repeat of Japan’s boom-bust disaster 20 years ago as exorbitant property prices combine with a demographic tipping point, a top Japanese official has warned.



“China is now entering the 'danger zone’,” said Kiyohiko Nishimura, the Bank of Japan’s deputy-governor and an expert on asset booms.

The surge in Chinese home prices and loan growth over the past five years has surpassed extremes seen in Japan before the Nikkei bubble popped in 1990. Construction reached 12pc of GDP in China last year; it peaked in Japan at 10pc.

Mr Nishimura said credit and housing booms can remain “benign” so long as the workforce is young and growing. They turn “malign” once the ratio of working age people to dependents rolls over as it did in Japan.

China’s ratio will peak at around 2.7 over the next couple of years as the aging crunch arrives. It will then go into a sharp descent, compounded by the delayed effects of the one-child policy.

“Not every bubble-bust episode leads to a financial crisis. However, if a demographic change, a property price bubble and a steep increase in loans coincide, then a financial crisis seems more likely,” he said in Sydney at a conference on asset booms.


Japanese stocks have fallen by 75pc and Tokyo land prices by 80pc since the economy first began to slide into a deflationary trap two decades ago, although real per capita income has held up well. Any such fate for China – a much poorer country today than Japan in 1990 – has shattering implications.

Such a warning from a Japanese official may ruffle feathers in Beijing. The Communist authorities have studied Japan’s Lost Decade closely and are convinced they can avoid the same errors.

The Pacific rivals are embroiled in a bitter dispute over the Senaku/Diaoyu islands in the East China Sea. Nationalists from both sides have landed on the Japanese-administered islands.

It is unclear how easily China can manage the hang-over after letting home price-to-income ratios peak at nose-bleed highs of 16 to 18 in the coastal cities of Beijing, Shanghai, Tianjin, and Shenzhen.

The authorities deliberately choked the boom by tightening credit last year but have discovered that it is not easy to stop the effects spilling into the rest of the economy, causing an industrial recession.

Export growth fizzled over the summer. Komatsu’s index of excavator usage – a proxy gauge of Chinese construction – fell 13pc in July. The Yangtze ship-building industry is in dire straits. China’s largest shipbuilder, Rongsheng, has not had a single order this year.

Richard Koo, from Nomura, said worries about China’s slowdown have spread from financial markets to national security officials.

Jing Ulrich from JP Morgan China said the mini-slump may drag on as Chinese exporters struggle with a recession in Europe, wafer-thin margins and price wars.

“The unpleasant situation for industrial companies is unlikely to change until the second quarter next year. The country’s stock market will face big challenges in coming months as excess production capacity becomes more obvious,” she said, predicting that growth would slow from torrid rates of 10pc to nearer 6pc over the next five years.

Premier Wen Jiabao has warned repeatedly that China’s economy is badly out of kilter. He is trying to wean the system off exports and investment – a world record 49pc of GDP – switching to home-bred consumer demand.

A report earlier this year by the World Bank and China’s Development Research Centre warned that the low-hanging fruit of state-driven industrialisation is largely exhausted.

They said a quarter of China’s state companies lose money and warned that the country will remain stuck in the “middle-income trap” unless it ditches the top-down policies of Deng Xiaoping. This model relied on cheap labour and imported technology. It cannot carry China any further.

The reformers agree but good intentions are fading as the downturn deepens. Those calling for another blitz of cheap credit to keep the old game going are gaining the upper hand.

The city of Chongquing this week unveiled a $240bn (£153bn) investment in electronics, car plants, petrochemicals and other industries over the next three years, equal to 150pc of its GDP. This follows vast spending proposals by Ningbo, Guangzhou, and Changsha, apparently with the blessing of state-run banks and the Politburo.

Whatever the offical mantra, Beijing is bringing out its bubble pump again.

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