Japan and China: mad investments make sense for locals

What do the booming Chinese property market and the staid world of Japanese government bonds (JGBs) have in common? Perhaps more than you’d think.

In this week’s MoneyWeek Asia, I looked at Chinese property. Put briefly, I concluded that local investors buying apartments to keep them unoccupied in the hope of selling them at a higher price in a few years time may not be as daft as it looks, given the limited choices they have for alternative investments.

Now, if that sounds like the dangerous ‘it’s different this time’ argument, I applaud your cynicism. But it’s worth noting that this isn’t the only situation where domestic investors are semi-rationally doing things that would be irrational for foreigners.

Take JGBs. Despite Japan having gross public debt of 180% of GDP, the yield on the ten-year JGB stands at 1.315% a year. How can the government get away with this? Because 95% of the bonds are held by domestic investors.

In a deflationary environment where interest rates are zero, businesses have spent two decades paying down debt, banks didn’t want to lend, and the stockmarket has been hitting new lows since 1989, there have been enough institutions willing to accept tiny but certain returns like these. That’s despite them being able to put their money anywhere in the world – unlike the average Chinese investor.

But while this may be sane(ish) for locals, it’s clearly not the best choice for people with more options. So foreigners should be as wary of buying a property in China as most would be of buying JGBs.

What’s more, neither trend is sustainable in the long term, even if it makes sense now. Japan must fix its finances or face a blow-out in borrowing costs. And the more new Chinese apartments that get built and sold, the less the current stock will be worth.

The question in both cases is: will investors spot the tipping point and stop buying in time?