If there is any country where bureaucrats, bankers and economists might want to learn from Japan’s mistakes right now, it is China.
It would not be the first time. A decade ago, I wrote a book about the 1990s Japanese banking crisis that became a bestseller in China. At the time, it came as a great surprise (not least because I never sold the rights to anyone in mainland China). But, in retrospect, it has turned out to be symbolic.
Never mind the fact that China is experiencing a spectacular explosion in credit and property prices that echoes that of 1980s Japan just before the bubble burst. Like 1980s Japan, China is also trying to transform a bank-centred, state-controlled financial system into something more centred on free capital markets. And, while that shift is needed as its economy matures, this creates huge risks.
So it makes sense that some senior Chinese officials have been quietly asking what they can learn from Japan’s mistakes – and that, even amid the wider diplomatic chill, the countries’ central banks have been discretely debating the issue of deregulation and bad debts too.
So what lessons should Chinese investors and policy makers learn? There are at least half a dozen; call them, if you like, the six Ds.
First, deceleration can hurt. Back in the 1980s, when Japan’s economy was booming, bank loans performed well. But, when the economy decelerated in the 1990s, bad loans soared. That might seem obvious but it took Japanese banks and bureaucrats by surprise. Chinese officials should take note, given that their growth rate seems to be falling below 7 per cent.
Deflation is deadly, particularly for banks. When prices fall, debt burdens rise. So, usually, do bad loans. Once again it is obvious but Japanese banks were unprepared for that, too. Alarm bells should ring if China ever slips into deflation: although the country’s consumer prices are positive, producer prices have been falling for 26 months.
Denial is damaging. Japanese banks were notorious for concealing bad loans (in 1992 they said bad loans were a mere Y8tn; by 2000 they had revised this to Y100tn.) That denial delayed a crunch but it made the eventual shock much bigger. China should pay attention, particularly given that its banks are already using financial trickery to flatter their books (look at how some are using opaque structures such as “trust beneficial rights” to conceal bad loans, to cite just one example). Indeed, their reported bad loan numbers seem hopelessly optimistic (officially they are about 1 per cent of assets; independent observers, such as Oxford Economics, say 10-20 per cent.)
Dominos can fall. Until the mid-1990s, investors assumed that Japan’s financial institutions were implicitly backed by the government and corporate partners via the so-called keiretsu system of close-knit conglomerates. So when a couple of small institutions failed, investors no longer knew what to believe and lost faith in the entire system. China should heed this fact: its system also depends on ill-defined, implicit guarantees – for banks and shadow banks alike. A collapse of several trust banks, say, could also create contagious panic.
Deposit insurance matters. As BoJ officials have recently pointed out, Japanese officials learnt in the 1990s that it is hard to contain panic with deposit insurance. China claims to understand this and recently announced plans to introduce its own deposit insurance scheme. But it is not yet in place, and Beijing has muttered about introducing it several times in the past decade.
Decision-making matters, too. One problem that bedevilled Japan’s financial system was that the political economy created a power limbo. The capital markets were not strong enough to enforce meaningful oversight of banks but state bureaucrats were no longer able to impose rapid decisions either. Investors need to watch carefully who is actually making decisions today in China and ask whether they have the powers to enforce unpopular moves. The leaders are not united.
Of course, there is a seventh D, which matters enormously, too, and which might even offset those first six points: the vast dollar reserves (and stores of other cash) that China holds. After all, another lesson from Japanese history is that if a country has plenty of financial fire, it can recapitalise its banks and ease the economic shock if a bubble bursts. China has already done that once in 1999, with a mini banking crunch; if the present bubble bursts, it may do so again. “The Chinese seem more willing to listen [to the lessons from Japan] than the Americans were [in 2007],” observes one Japanese policy maker. “That may be good.”
But the sad fact is that the bigger China’s credit bubble grows, the trickier it will be to mop up the aftermath; particularly given that data points to slowing growth. Better just hope that the Chinese keep learning the right lessons from the financial history books; if not, Japanese officials may soon need to translate the phrase: “We told you so.”
但不幸的是，中国的信贷泡沫吹得越大，善后的难度就越大，尤其是考虑到数据显示经济增长放缓。我们最好希望中国人不断从金融历史书籍中汲取正确的教训，如果他们未能汲取教训，日本官员可能很快就得翻译这个短语了：“We told you so（我们告诉过你了）”。