Is China following Japan's economy and stock market?

Chinese markets are stuck in “limbo”, say Abhishek Vishnoi and Winnie Hsu on Bloomberg. Fund managers complain the shares lack both “the vigour of an emerging market and the stability of a developed one”. The benchmark CSI 300 index is down more than 6% this year, leaving it on course for a fourth successive annual loss. Since a 2021 peak, roughly “$6.5 trillion has been wiped out from Chinese and Hong Kong” shares – the value of Japan’s entire stock market. 

While much of the world struggles with inflation, China has been battling the opposite problem, says Jacky Wong in The Wall Street Journal. On one measure, the GDP deflator (the gap between nominal and real GDP growth), the world’s second-largest economy has “already been in deflation for five straight quarters”. Falling prices can harm growth, with consumers holding off purchases for hope of cheaper deals ahead. 

How is China historically similar to Japan? 

Rather than UK-style furlough schemes, stimulus in China during Covid focused on infrastructure and building up new industries such as electric vehicles (EVs) and renewable energy. That might prove a wise long-term move, but the resulting “excess” manufacturing capacity cannot currently be absorbed domestically, triggering a surge in exports, which grew 8.7% in the year to August. 

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Why is domestic demand so sluggish? Because local consumer confidence is not far off the historic low it reached in November 2022, says Ralph Jennings in the South China Morning Post. The root cause is a weak property market, say Nomura analysts, who estimate that prices of existing homes have dropped 30% from a 2021 high. When households feel poorer they spend less freely. And with corporate profits coming under pressure, “Chinese consumers have become more frugal”, since they “are worried about the prospects for wage growth and job security”. From “an overreliance on construction” to “a dependence on export markets” and “a rapidly ageing” population, China “shares many similarities” with the deflation-prone Japanese economy of the 1990s and 2000s, says Peter Hannam in The Guardian. 

Investors should remember that Japan’s Nikkei 225 took 35 years to regain its 1989 peak after the Japanese bubble burst. Comparisons with Japan are overstated, says Bloomberg News. China still has more scope for urbanisation and “catch-up” growth than Japan had in 1990, by which point the latter was already a high-income economy. A better parallel might be with South Korea. 

Following the 1997 Asian financial crisis, Korea seized new opportunities in semiconductors and smartphones. Similarly, China is now emerging as a leader in new green technologies and is already the world’s biggest EV market. Investors are on a global hunt for bargains, but China – where stocks trade on 11 times earnings – is conspicuous by its absence, says Katie Martin in the Financial Times. Whoever wins the US presidency, more tariffs look likely, jeopardising Beijing’s efforts to export its way out of trouble. “No one is interested in buying Chinese assets,” says Vincent Mortier of European asset giant Amundi. “I have never seen such a big pushback among all our clients.”

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