SocGen's Dylan Grice: China Is A Decade Away From Japan Style Doom

China Flood

(Note this report is from September 2009, so Grice’s outlook may have changed. We found it interest with all the long term bullishness about China, nevertheless.)

China is currently experiencing a tremendous amount of cash inflows, as it has been labelled the best of the emerging markets kings, the BRICs. But all that money could be funding a massive bubble.

But the bubble story, which is well heard of, is only part of the comparison. Grice notes that China also has a similar population problem, brought on by the one-child policy, that will eventually lead to a demographic crisis similar to Japan’s.

First, on Japan’s lost decade, from Grice (emphasis his):

Something else happened in Japan in the early 1990s which receives less attention but provides a simpler explanation for its post-bubble experience: demand is deflating because the workforce is shrinking (see the first chart on page 3). The table below shows that while Japanese real GDP growth has indeed significantly lagged behind that of the US over the past 20 years, per worker GDP has broadly kept pace, even outpacing it over the last five.

Grice then notes the five things the two economies, Japan pre-bubble and China, have in common:

  • Absence of democracy
  • State-directed capitalism
  • Currency manipulation and reserve accumulation
  • High saving/investment ratios, low domestic demand
  • And the geopolitical swing

While the first four are all largely self explanatory, the last one is particularly interesting.

Grice sites Edward Chancellor’s opinion that, “manias frequently accompany significant geopolitical shifts.” Prior to the Japan bubble burst, the country was rising and considered an emerging threat to the U.S., similar to China now.

Dylan Grice Geopolitical

All of this adds up to China looking just like Japan, but for one thing. Grice notes that liberalisation of the capital account would allow money to gush into China and push up the values of equities, just as it did in Japan. And with China pushing for Shanghai to be a world financial centre by 2020, this is now starting.

As China begins its capital account liberalisation it’s difficult to see how it will avoid the same fate as Japan. Its economic growth will be as giddy, as will the West’s wonderment at the unique Chinese way. And with the Middle Kingdom at last regaining its rightful place, the inevitable mix of national hubris with abundant liquidity will be as intoxicating. The lesson from Japan is that the journey towards China’s climactic bubble is actually only just beginning.

So get ready for a massive collapse in China and a Japanese style fall out…eventually.

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