Is China turning Japanese?
The key question for China now is whether it can avoid repeating the fate of Japan in 1989 and its “lost decades”.
Investors have been "a bit sniffy" about domestic Chinese shares for years now, says Patrick Hosking in The Times. Shares traded in Shanghai and Shenzhen, known as A-shares, have a reputation for "patchy liquidity", dodgy corporate governance and potential interference by a capricious state. But things are about to change. US index provider MSCI has decided to include some A-shares in its emerging-market index (see box below). So soon you could be invested in the likes of Gree, the market leader in air conditioning, or windscreen manufacturer Fuyao Glass.
But as this market opens up, the spotlight is once again on China's long-term prospects. The key question now, say Leo Lewis, Tom Mitchell and Yuan Yang in the Financial Times, is whether the world's second-largest economy risks "repeating the fate of what was the world's second-biggest economy in 1989 Japanese-style lost decades'".
China's total debt is 250% of GDP and climbing. The state is trying to deflate a real-estate bubble and the government is grappling with the aftermath of a stockmarket bubble that burst in 2015. The worry is the sheer speed with which China has reached Japanese debt-bubble levels. Private-sector debt has soared from 115% of GDP to more than 210% in nine years. In Japan it took 25 years to double.
The system is rife with bad debt, not least because China's obsession with economic growth encourages officials and bankers "to wink at lending based on non-existent collateral", as Pete Sweeney notes on Breakingviews. A Lehman-style meltdown is unlikely, as the state owns the banks and can force them to keep writing loans. But if China doesn't get on top of its debt, zombie banks and companies, along with spooked consumers, could lead to Japan-style stagnation.
Nevertheless, bears have been warning for years that China is about to face a "hard landing", and Chinese policymakers "have proven themselves relatively eager reformers", as Freya Beamish of Pantheon Macroeconomics notes. Regulators are probing how some big local corporations known for high leverage and opaque operations funded overseas acquisitions.
Chris Leung of investment bank DBS says that more than $1trn of state-directed mergers have occurred since 2014, reflecting a drive to reduce overcapacity and bolster productivity. MSCI's seal of approval suggests that corporate governance is getting better. So the jury is still out on China's transition.
In the meantime, investors will continue to take a stake in a country that remains one of the world's fastest growers. It is, says Leung, "too gigantic a market to be ignored".