THIS MATERIAL IS A MARKETING COMMUNICATION.
What Lessons Can China Learn from Japan in the 90s?
Japan’s property bubble in the 1990s triggered a pro-longed balance sheet recession, leading to a period known as the “lost decades”. Some investors worry that China will follow in Japan’s footsteps and that the current property slowdown would lead to a similar consequence. In this article, we explore the causes of each situation and analyse their commonalities and differences.
Some investors are concerned that China will follow in the footsteps of Japan’s property bubble in the 1990s and enter a pro-longed balance sheet recession. But there are a number of reasons why we are less concerned:
1. China’s homebuyers and financial sectors are relatively insensitive toward property price movements
China has a relatively high down payment ratio and low loan-to-value ratio (~50%)1, which means it can tolerate much higher price drops without resulting in negative home equity and fire sales, which would further exacerbate the fall in value.
2. Unlike Japan’s case in the 1990s, China does not have high participation of real economic sectors in land speculation
For Japan, most large corporations from various sectors participated in land speculation in the late 1980s, with cheap funding from financial institutions. Hence, when the land bubble burst, it dragged down the whole economy, which fell into a vicious cycle of debt repayments and stagnant economic growth (balance sheet recession). However, China’s land market is nationalised and, thus, has limited speculation activities. Additionally, over the past few years, Chinese regulators have pre-emptively lowered leverage within its financial system and built firewalls between banks and the property market.
3. Compared to Japan, China’s urbanisation rate is still low
Japan didn’t have any property bubbles before its urbanisation rate reached 75%. China’s current urbanisation rate is well below that level.
Nevertheless, there are some similarities we see in China now compared to Japan’s 1990s era:
1. Ageing population
Japan experienced a property downcycle in the mid-1970s. However, there was still a healthy population growth and large working age group at that time. But since then, the country began to experience a worsening ageing problem, which caused a fall in demand for housing and the subsequent bubble in the 1990s. China seems to be experiencing a similar trend to Japan in the 1970s.
2. Economic engine shift and metropolitanization
Since the 1980s, Japan’s financial market open-up, especially after Plaza Accord, led to a boom in Japan’s tertiary industries (primarily across financials, real estate, and retail), while manufacturing sectors lagged behind.
This accelerated the metropolitanization of key city clusters and the unbalanced development of urban and rural housing structures. This is somewhat similar to what happened in China. With the fast development of tertiary industries (i.e. financials, real estate, internet, etc.), we began to see an under-supply of housing in high-tier cities and over-supply in low-tier cities, while rising land and labour costs are squeezing out manufacturing industries.
Making sense of recent government policies
Given the lessons from Japan’s property bubble, we can understand why the Chinese government has paid more attention to declining birth rates and decided to crack down on private property developers that are mostly responsible for housing over-development in low-tier cities. Moreover, shifting more support to high-end manufacturing industries can also slow down the pace of metropolitanization and mitigate unbalanced housing development issues.
Staying Ahead with Mirae Asset’s Latest Insights
1. Source: Morgan Stanley, August 2022
Disclaimer & Information for Investors
No distribution, solicitation or advice: This document is provided for information and illustrative purposes and is intended for your use only. It is not a solicitation, offer or recommendation to buy or sell any security or other financial instrument. The information contained in this document has been provided as a general market commentary only and does not constitute any form of regulated financial advice, legal, tax or other regulated service.
The views and information discussed or referred in this document are as of the date of publication. Certain of the statements contained in this document are statements of future expectations and other forward-looking statements. Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance or events may differ materially from those in such statements. In addition, the opinions expressed may differ from those of other Mirae Asset Global Investments’ investment professionals.
Investment involves risk: Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the Fund will generate a return and there may be circumstances where no return is generated or the amount invested is lost. It may not be suitable for persons unfamiliar with the underlying securities or who are unwilling or unable to bear the risk of loss and ownership of such investment. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the Fund and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Sources: Information and opinions presented in this document have been obtained or derived from sources which in the opinion of Mirae Asset Global Investments (“MAGI”) are reliable, but we make no representation as to their accuracy or completeness. We accept no liability for a loss arising from the use of this document.
Products, services and information may not be available in your jurisdiction and may be offered by affiliates, subsidiaries and/or distributors of MAGI as stipulated by local laws and regulations. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Information for EU investors pursuant to Regulation (EU) 2019/1156: This document is a marketing communication and is intended for Professional Investors only. A Prospectus is available for the Mirae Asset Global Discovery Fund (the “Company”) a société d'investissement à capital variable (SICAV) domiciled in Luxembourg structured as an umbrella with a number of sub-funds. Key Investor Information Documents (“KIIDs”) are available for each share class of each of the sub-funds of the Company.
The Company’s Prospectus and the KIIDs can be obtained from www.am.miraeasset.eu/fund-literature/ . The Prospectus is available in English, French, German, and Danish, while the KIIDs are available in one of the official languages of each of the EU Member States into which each sub-fund has been notified for marketing under the Directive 2009/65/EC (the “UCITS Directive”). Please refer to the Prospectus and the KIID before making any final investment decisions.
A summary of investor rights is available in English from www.am.miraeasset.eu/investor-rights-summary/.
The sub-funds of the Company are currently notified for marketing into a number of EU Member States under the UCITS Directive. FundRock Management Company can terminate such notifications for any share class and/or sub-fund of the Company at any time using the process contained in Article 93a of the UCITS Directive.
Hong Kong: This document is intended for Hong Kong investors. Before making any investment decision to invest in the Fund, Investors should read the Fund’s Prospectus and the information for Hong Kong investors (of applicable) of the Fund for details and the risk factors. The individual and Mirae Asset Global Investments (Hong Kong) Limited may hold the individual securities mentioned. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Copyright 2021. All rights reserved. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of Mirae Asset Global Investments (Hong Kong) Limited.