China does not share Japan’s obsession with golfing, nor a ‘balance sheet recession’

The various market and economic crises over the years have boosted the global reputation of several market commentators including Nouriel Roubini, dubbed the “Dr Doom” for his pessimistic prognosis that had turned true. Richard Koo, chief economist of Nomura Research Institute, gained wider prominence for his “balance sheet recession” thesis which was applied retrospectively to how post-bubble Japan — both corporates and households — focused more on reducing their debt load, than to invest for new growth, leading to the deflationary decades which Japan is only starting to recover from over the past years.

Koo believes that China is too suffering from a balance sheet recession and that big gun stimulus from the government is needed if the country wants to avoid what happened to Japan.

Wong begs to differ. “The Japanification of China”, he argues in a recent paper, is “plainly wrong”. In a way, Wong is uniquely positioned to comment on both China and Japan. After graduating from Hitotsubashi University in 1981 under a scholarship from the Japanese government, he spent his early working years in Japan, where he witnessed the bubble forming — and bursting.

Wong recalls how his colleagues spent three years coaxing him to join them in golf and to also buy golf memberships, which cost from US$500,000 each — a hefty sum today, and certainly more so 35 years ago. In addition, there was plenty of speculative activity surrounding golf memberships and a Nikkei Golf Index was even created, part of a series of “hubristic exuberance” observed by him in Japan then. In contrast, Xi banned the Party cadres, government officials, military officers and SOE executives from playing golf more than a decade ago. A hundred golf courses in China built on land acquired via dubious means were shut.

Anecdotal differences in golfing aside, there are other quantifiable differences between China and Japan. At the previous peak, Japan was trading at more than 70 times earnings. Retail investors borrowed to put their money in, and so did Japanese companies, which were generating much higher returns punting the stock market than their core business of, say, manufacturing.

In contrast, China’s recent peak in 2019 and 2020 was at just 15 times earnings. Wong points out that the bull run in China then was also driven by so-called “long runway stocks”, similar to America’s Nifty-50 back in the 1960s. The big surge was confined to sectors such as e-commerce, mobile games, tuition and pharmaceuticals, while the rest of the market stayed “sober”, forming a twotiered market where the euphoria did not pervade every corner.

Another key feature of Japan’s boom back then was the real estate bubble. At its peak, the 1.15 sq km land area occupied by the Imperial Palace in Tokyo was worth more than the entire state of California. In contrast, at China’s property peak, the land occupied by the Forbidden Palace — three times larger — was worth a mere fraction of San Francisco’s housing stock worth US$2 trillion in 2022. While Japan’s real estate bubble was allowed to largely form unchecked, China was already introducing rounds of measures as early as 2010 to cool the market.

In a way, Xi gave fair warning with his repeated calls that housing is not meant for speculation but to live in. A tipping point was finally reached in the August 2020 “three red lines” that restricted new borrowing. Despite the doldrums suffered by the developers, prices in Tier 1 cities are around 15% off their June 2021 peak. “The colossal difference between present-day China and the 1990s Japan may have been missed by economists on the China Japanification bandwagon,” says Wong.