China Tries Japan's Approach to a Stock Bubble | Hacker News Reader

China Tries Japan's Approach to a Stock Bubble

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74 pointschollida159 comments

The similarity between China now and Japan 1990 is very noticeable. That is, they're both exporting country that has an aging demographic which likes to save, has a small consumer base compared to export, and is losing export shares as production moves out of country to other cheaper countries. And they both choose to save the banking system instead of letting it self correct. This means that China will likely see 10-20 years of deflationary decline just like Japan. However, because China suffers from massive capital outflow from rich leaving the country, and it already has reached very high debt to GDP ratio (something Japan reached only years later after 1990), I would say China is in even worse shape than Japan in 1990.

There's a real difference in the military stance, though. Governments who'll countenance military action often turn to it to build popular support, an option that wasn't meaningfully available to 90's Japan.

They are very different countries. Putting them into the same category seems not a good starting point, if one really wants to dig deep. Of course, it's easier to have a rough idea with this approach for many.

There are other differences: Japan was essentially a fully developed nation by the time the crash hit, while large parts of China are not. Also, Japan has a more or less functioning democracy capable of letting its people changing those in power peacefully, while China does not.

"Changing" up to a point -- the LDP has been in power continuously until 2009. What people could do was just to force occasional reshuffles, which is not very different from what the Chinese can do today.

    > Japan has a more or less functioning democracy

I note that the same party was in power for 55 years prior to 2009.

Same can be said for many (western) European nations...

Many? If we're talking the last thirty years or so, I can think of Luxembourg and Ireland, although if you're going back 20 years, I guess there's Italy too. Where did you have in mind?

For stock markets in the two countries, no, they are different.

The stock market in China was remarked as 'worse than a casino' by a Chinese economist, Wu Jinglian.

> they both choose to save the banking system instead of letting it self correct

People keep saying this but few governments in modern financial history have gotten away with letting the system "self correct". Normally it's a recipe for deep depressions or long recessions.

Some economists have a recommendation: letting the system self-correct might produce positive long-term results if you print enormous amounts of money to replace the missing credit--enough to cause potentially double digit inflation. But usually, the let-everyone-die crowd doesn't believe in monetary policy; they're just advocating old economics from 1929 that usually fails.

> People keep saying this but few governments in modern financial history have gotten away with letting the system "self correct". Normally it's a recipe for deep depressions or long recessions.

I'd go further and say it's lazy and highly irresponsible. We could (and as humans, tend to) say the same about famine and war, for example, or any situation where others are doing the suffering. You may have heard the line, 'in the long run, we are all dead'. The full quote from John Maynard Keynes, one of history's leading economists, was a response to such an idea:

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the sea is flat again.

I think that's a valuable guide to any situation, not only to economic problems.

> it already has reached very high debt to GDP ratio (something Japan reached only years later after 1990)

Could you elaborate on this? China has a pretty low national debt the last I checked. http://www.wolframalpha.com/input/?i=%28china+debt+%2F+china...

here you go -> 282% of GDP http://www.bloomberg.com/news/articles/2015-05-08/china-s-ve...

Ah OK, this is including the debt of citizens and corporations. Not just the national debt.

This seems like a big stretch. Because there are a few similarities, we can predict 10-20 years of economic performance? As far as I know, even the most sophisticted governments, econoimsts, investors, and businesses haven't cracked the code on predicting future economic performance.

I also disagree on the similarities. They are/were very different countries. Japan was an advanced economy, with an advanced stock market, banking system, as well as a democratic government; China is a developing economy, with an immature banking system and market, and is run by a corrupt authoritarian dictatorship (is there any other kind?). The stock market is small relative to its economy[1].

Crucially, China's government's legitimacy comes mainly from economic performance -- that's their justification for ruling the country, nobody elected them. If it loses legitimacy and the people want a new government, there is no mechanism to replace it (such as the elections in democratic countries), creating a risk of political upheaval in the largest country and one of the largest economies in the world.

[1] http://www.economist.com/blogs/freeexchange/2015/07/chinas-s...

I Dunno.

http://www.debtdeflation.com/blogs/minsky/

China's been in the news for the past week and we've had alot of stories posted about it. This is the best summary of the Chinese stock market that I've seen.

This particular thread:

https://news.ycombinator.com/item?id=9849360

Is what made me post this. I understand that most people don't understand the markets but that thread in particular has alot of embarrassing and flat out wrong ideas in it.

EDIT it turns out I posted a link to the middle of the document. Below is what the link should be:(

http://newsletters.briefs.bloomberg.com/document/25z1bq1xnb2...

It's just a Casino operated by rulers. Many in China know it. But average people just can not resist the lure. This has happened in China several times. The new generation (perhaps those were born after 1985) is getting their own lessons and pay the tuitions this time.

[edit]: to downvoters, reason for downvoting my comment? If you are not familiar with average people in China, please do your homework.

Upvoted, because you hit the core issue. A lot of money is just betting and doing no research past staring at stock valuation chart.

Sell if stock is going down, buy if it goes up. That tends to amplify random noise to a high level of volatility.

Contagion risk to the rest of Chinese economy is what the people should be worried about. A lot of the bets have been done with money loaned from somewhere. This will affect the rest of the economy.

Many average investors just watch what's said on media and friends and take the follower strategy. Actually rulers are taking advantage of it, though it seems hard to believe at first.

Is it even possible to conduct proper valuations of Chinese equities? If the equity markets have the same standards for transparency as other sectors of Chinese society, I don't see how that's possible.

I've heard an anecdote like : US citizens are more likely to bet against the trend Chinese citizens are more likely to bet with the trend

Is that what you mean?

That's not what I mean. Casino owners use it as a way to make money out of the players. This applies to the financial market in China.

> But average people just can not resist the lure.

This is simply because there are few alternatives. The Chinese people are making more money than they need to spend, and as a lot of them do not trust the government to honor it's promises about pensions, they want to save the rest for old age. The Chinese government does not like the very positive savings rate, and tries to force it down by limiting the ways the people can save and invest money, by imposing tight capital controls and limiting domestic investment opportunities. What's left is the shadow banking system, which could collapse at any moment, domestic stocks which are terrible, real estate which has limited opportunities, and weird stuff like hoarding gold.

In 2013 it was revealed that Bloomberg censored China reporting that was objectionable to the Chinese government. I'm not sure why anyone trusts their reporting now.

http://www.nytimes.com/2013/11/09/world/asia/bloomberg-news-...

EDIT: Whey I say, "I'm not sure", I mean it. Is there more to the story?

Bloomberg's web site (including this article) are blocked in China.

Let's get real about the China stock market "crash" -- all major China stock indices are still up between 30% - 70% from 12 months ago. Somehow the run-up in prices was business as usual, but the slide down is a catastrophe. A real crash has much further down to go. (scroll down to the China indices) http://www.bloomberg.com/markets/stocks/world-indexes/asia-p...

That's a pretty bad way to look at a bubble and feel calm. In reality, most bubbles at start are bought in by smart money, insiders, big boys etc. and at the end (peak) are bought by retail investors - mom&pop, grandmothers etc. who are not sophisticated and put their life savings or borrow on margin and bet on single stocks (not the index). They see the rise in individual stocks and get in too late. These retail investors are feeling the pain right now and their loss is huge.

So yeah, I wouldn't feel calm about the bubble bursting.

It's certainly a shame when unsophisticated investors pile in after a huge run-up in prices. The good news is that if they got in one year ago they are likely still above water. If they got in after that they should have been wary of bubble prices.

You are assuming the slide is going to stop today and/or that they can pull their money out today. If there is a huge rush to pull money out of the market it will accelerate the decline. A classic bubble pop.

Because the nice guys wearing suit and tie tell them it is all perfectly save, just sign the dotted line and they will put your (loaned) money to work on the market...

The issue is 80% of investors are retail/ mom and pop investors. Not banks, funds, etc. Likewise most stock is purchased on the margin with loans leveraged against potential (and expected) growth of the stock. This is literally what happened to the US before the Great Depression. Not only are people losing their life savings, but they're immediately shackled to debt they have no means to pay off.

So now a larger number of brokers/banks are tied to toxic debt, which is in a quantum of state of both being/not being an asset (if you think it is the crash of 2008 wouldn't have happened). While I doubt we will see bank failures (The CPC will step in), it will resonant.

The timeline for the rise and fall of prices has been very fast. For example, if the US stock market indices double in price tomorrow then fall by 50% a week later how much worse off are we? Yes some people are getting hurt by this, but not as much as if the run-up in prices had been more reasonable.

oooh margins! So it's gonna be more like USA 1929 or 1907...

According to the Economist, a very small fraction of Chinese households are invested in the stock market.

<1% of Americans owned stock when the market crashed in 1929. But its slightly beside the point. The depression was more triggered by a perfect storm of incompetence/environment debt.

-Hawley-Smoot Tariff did not work at all, and made things MUCH worse.

-Farmers burning their crops in protest of rock bottom prices post crash instead of selling them.

-The Dust Bowl worsened the situation greatly.

-Wide spread bank failure.

The government is panicking, the latest move being to forbid big holders (> 5%) to sell for 6 months. This is something real, if for nothing else the inept response of the authorities will poison the market for a long time as the regulatory incompetence needs to be priced in. And this is true no matter how much the international 50-cent brigade wants to diminish it.

"The real fallout from China's troubles would be regional." I wish that was true... though I wouldn't treat it as obvious fact.

China is big enough that it woes can cause global impact. Given that a lot of indexes (e.g. S&P500) are all time high, central banks have close to 0 interest rate, there is little room for maneuver...

Economist's recent article: http://www.economist.com/news/leaders/21654053-it-only-matte...

On the upside, the AUD will probably shit the bed now. Which is nice, because I'm more than happy to come back in a year or two and pick up a little terrace in Newtown for something resembling a sane asking price.

Yes, this plus the impending US interest rate climb means the AUD will probably drop like a brick. Good for those of us not in the country, but with most everything except food being imported nowadays I can't imagine how people down there will live...

Yeah, I'm feeling that it'll be a bit like the late 90s/early 00s at least from an exchange perspective. But coupled with a pretty inevitable housing bust on a massively inflated market. . . . It's going to be tough going for a while.

That said, it'll be a good time to be selling to the US market.

If you have the resources, seems like an appropriate time to implement a good home infrastructure for yourself. Do it once, do it well, then go into maintenance mode. It's the incessant need for NEW that screws most people up. On the plus side, to a point, it does help the export market. That is if the main importing economies themselves haven't tanked or lost an appetite for your stuff.

Maybe a year ago this was posted at HN: http://qz.com/198458/zombies-once-destroyed-japans-economy-n...

An interesting article comparing China today and Japan in 1980-s, and predicting problems for China.

It's not that impressive considering an article positing doom and gloom for China's economy has been in the mainstream news about once a week for the last decade. :-)

I wasn't aware of that :)

The title sounds very clickbait, or is that just me?

It absolutely is.

The actual title of the article, which is actually semi-informative, is : China Tries Japan's Approach to a Stock Bubble

Sorry, that's what the actual article's head line is. I didn't want to change it.

Scroll to the top of the article. I accidentally linked to the middle somehow.

Then apparently Bloomberg did, because now it reads "China Tries Japan's Approach to a Stock Bubble".

This is par for the course with Bloomberg. "Stocks Down After Blah" frequently changes to "Stocks Up After Blah".

Here's an interesting analysis from The Economist:

http://www.economist.com/blogs/freeexchange/2015/07/chinas-s...

Quick summary: The market isn't in such horrible shape, and it's impact on the economy is much smaller than in more advanced economies, so why the panicked response?

Will this effect the US economy/stock market?

yes

No. The Tokyo stock exchange crash in the 80s didn't, nor did the Asian financial crisis in the 90s. It's a local issue. Unless you or your company have direct exposure to China you should be fine. For the USA and Europe, Greece is a much, much bigger deal because it's much more heavily integrated into our financial systems.

I wouldn't say that there will be no effect, but I don't think the US stock market is going to be too severely impacted. It's kind of crazy to think that because China is our largest trading partner and we manufacture so many goods over there, but most of what we do isn't tied that heavily into their stock market.

It is a classic speculator's Ponzi Scheme, based on social contagion and mass hysteria, what else?

Rest easy, Goldman's assure us there's no bubble. Where there is major government fraud, Goldman's are there. Goldman's assured the world that Greece's immediately doubling debt value to cheat the EU rules was fine so they've given themselves a reputation in these matters.

Where are Goldman's involved? Short it.

So in other words, an asset class that has been run-up very quickly is falling very quickly. The media acts like this is unusual, when those who actually study markets see that it happens all the time.

Should we go to reddit to read news like this? Look at the frontpage, we have two entries for the blooding Chinese stock market. Please let's get away from these stories and stay with what Hacker News should be.

Reply on news.ycombinator.com