Is China Set For A Japan-Style Lost-Decade?

Tyler Durden's picture

"The extent of unproductive investment in China today is much greater than was the case for Japan at a comparable phase of development," warns Deutsche's EM strategist John-Paul Smith, and one glance at the chart below suggests China is tracing an ominous path towards the same "lost-decade" that un-inspired Japan since the mid-80s. While the PBOC is less interested in goosing its own stock market (since ownership is so low), Chinese stocks (down 60% from 2007 highs) "seem to be saying that there is a significant risk of a major slowdown."

As Bloomberg adds, China’s lending surge over the past five years has evoked comparisons to the debt growth in Japan before its lost decade. Credit in the biggest emerging economy rose to 187 percent of gross domestic product in 2012 from 105 percent in 2000, compared with Japan’s increase to 176 percent in 1990 from 127 percent in 1980, according to JPMorgan Chase & Co.


Source: Bloomberg

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Haager's picture

China? Would you please turn an eye on Europe if you talk of a lost decade Japan-Style?

NoDebt's picture

Yeah, but their stock markets are hitting new highs, which is all that matters.

The survival of financial system is more important than anything else.  Ancient societies built pyramids, totems, Stonehenge, cave drawings or giant geoglyphic art.

We built awesome numbers in a spreadsheet.  That's our contribution to human history.  When they see those asset accumulation numbers reaching into the trillions many centuries from now, they are going to marvel at it.  "How could such a primitive society have dealt with such huge numbers??" they'll wonder, with their mouths hanging open in amazement.

knukles's picture

Lost decade?
Japan's going on 30 years of a "lost decade"
Europe as well?
U betcha


And don't forget the good old USofA, because the same policies in force here and now, folks.

CrazyCooter's picture

It was a typo; they meant tricade.

The premise of the OP was very interesting though. I am slowly coming around to a deflation-for-everyone perspective.

Oh, and a big, fat war.



TruthInSunshine's picture

China has basically come out & openly stated they're going
to massively devalue the CNY (as I've been stating is necessary given their export-INTENSE economy) relative to developed nation currencies, and there's not a damned thing that will be done to stop them from doing so given that a) trying to stop them from doing so will impede their ability to clear their massive toxic debts that their banking system is sitting upon, b) trying to stop them from doing so will merely accelerate and deepen the now renewed global'economic crisis, in no small measure to crises in emerging markets (and a very weak BRIC wall), c) doing so will most assuredly guarantee a nasty, protracted trade war, with many reciprocate tariffs & import sanctions (see D as to why this will not be welcomed by western firms), and D) Western firms have now built out TRILLIONS in plant/factory & R&D investments, now captive holdings planted on Chinese soil, with 50 year growth plans largely dependent on sales in China and exports of Chinese manufactured components/goods to the rest of the globe (so, they're likely to lobby for gentle treatment of China).

I will not be shocked to see the CNY pegged at 8 or even 10 to 1 USD within 18 months, and to be honest, 12 to 1 is not a ridiculous target position for a 24 to 36 month time frame. That would be a currency devaluation against the USD (and Euro, most likely) of 50%.

CrazyCooter's picture

A recent ZH post about commodity backed lending finally clicked. Care to swagger a post about how this unfolds when they are sitting on huge piles of resources necessary to engage in trade without sucking up inputs from other exporters (looks at Australia).

Doesn't that add to their devaluation "strength"? I mean, can they cut the exchange rate and then absorb internal sources of materials (with internal losses)?

I have a loose grasp of things as it is and there are so many vectors in so many directions.

Thanks for you post, I am going to chew on it for a while.




disabledvet's picture

this is a great comment and one deserving of an albeit (from me) uneducated "guess"(as I'm not an economist either in training or professionally.)

My first and only thought concerns one issue namely the problem of capital flight (and as a corrolary I imagine...true repression...straight up asset seizures with not even the concept of due process) and what this means when you have a combination of "malign neglect" of your capital markets (Shanghai as of "no consequence," Hong Kong as pegged to a hugely suddenly soaring dollar) and a simple disdain for the existence of banks period...not just "banking."

Germany had a terrible hyperinflation....ONCE.

China has has a MULTITUDE of them over centuries if not millenia.

This is a REALLY smart while on the one hand they'll go along for the ride on asset side...they'll park the cash flow in a Western/Scottish Bank.

These folks know a sophisticated financial system (Wall Street) when they see one...and they know as well about Karl Marx's "stages of development" and Mao who coined the term "third world" to represent both "his" people...and the people he was speaking too...namely "almost the entire world."

A space program run out of China is run by Space X and "a couple of investors" is something that does not go unnoticed "back East."

Apostate2's picture

My first and only thought concerns one issue namely the problem of capital flight (and as a corrolary I imagine...true repression...straight up asset seizures with not even the concept of due process)

Yes indeed. When, not if the Fed raises rates the migratory birds will fly and bring their nests with them. 

TruthInSunshine's picture

Yes, no one can know the future, but I don't believe it's a stretch of the imagination to envision a scenario where the Chinese Authorities implement some very strict capital controls that will be effective, since they already have the information & control on & over citizens & regional banks to do so.

Apostate2's picture

We are in agreement. However remember that besides the foreign investors a good portion of that number is offshore Chinese money that was reinvested into the mainland (as foreign investment) to avoid taxation. It will flee also. Capital controls may be one part of the equation but the big money (both foreign and Chinese 'foreign') will take flight.

Confiscation of gold held by hoi polloi is also a possibility. Needless to say, if the property bubble pops, the ramifications will hit speculators and with the shadow banking derivatives that runs throughout the economy. 

thestarl's picture

Does it matter what they do TIS?The consumer is so fucking tapped out who's left to buy their shit.

TruthInSunshine's picture

This is a major problem for Chinese exporters of discretionary goods, as I agree that consumers are, as you say, "tapped out" (and reducing purchases of discretionary goods), as are businesses, increasingly.

However, this only adds to China's incentive to crash the price of exports, since there is a level at which such goods will still sell in higher numbers than they would if priced higher (the demand curve).

thestarl's picture

 When they see those asset accumulation numbers reaching into the trillions many centuries from now, they are going to marvel at it.

Tell you what ND your optimistic there brother, on the current trajectory of mankind the place will be a radioactive wasteland.George Miller and Byron Kennedy's 1979 epic Mad Max springs to mind.



tradebot's picture

What do you think the US is doing?  We're 5+ years into a lost decade!

rotagen's picture

No.  That would require a ROTHSCHILD STYLE CENTRAL BANK.

max2205's picture

What happened to that depression chart we were supposed to be on track for.....oh fuck it

Nathan Hale's picture

Isn't that 'lost decade' pushing 3 now?

syntaxterror's picture

Wow, PRofC needs to hire newly retired Ben Bubble-naki to turn that 60% drop in Chinese stox to a 300% gain!

Mine Is Bigger's picture

I don't think China is so lucky.  Once their economy collapses, people will revolt and the country will break apart.  Their elite must foresee this.  That's why they have been stashing their wealth outside China.

gosh's picture

According to John Titor China will annex Japan, Korea, and taiwan.

jez's picture

How will that help?

Comebackkid's picture

How would that help and how would they be able to pull that off? Unless the states hits the dumps like people say it will (for how long now?), thus losing its ability to maintain those countries within its bubble, China isn't doing shit.  Especially if they have their own problems, prepare for a fractured China. 

Let them eat iPads's picture

Those locusts would have trouble taking just Taiwan.

Japan would kick their asses. Again.

Comebackkid's picture

The sad thing is, China has in no way achieved the social stability and standard of living that Japan did in its run up to The Great Bubble.

The people will suffer much more than they did in Japan if they run into a similar episode. 

jonjon831983's picture

+ know any iconic international Mainland Chinese brands?

Let them eat iPads's picture

Yeah, there was that tainted pet food company.

Damn, what was their name again.

Never One Roach's picture

I have several Chinese co-workers...all say the same thing since the 2008 crash....."the stock market is black hole never to be touched." One lost over $2 million on Lehman MiniBonds. They simply will never  buy a paper stock again...

What do they spend their hard earned money on?

Hard assets and education.

earleflorida's picture

china is all too aware that for the most part, QE was kept (weight`ing overextented? ) alive... a, 'Lot' longer than necessary to force the hand of the PBOC/ PBC!


indeed, the japanese, trap`eze act!!!

sad... that the ussa has painted itself in a rotunda corner with no`known rational radii default-out, except to foment a casus belli...

china will become the neo-isolationist for as long as it takes, leaving the ussa to only one obliging paradoxial adverary. that's right(?)-- being the entire free-world that owes it's existence to the almighty dollar-bill(?) having vomited up all the filthy fiat that the masters of this 'nwo' can muster!  gambits on sale? surely all asians, caucasian, africans, etel, think alike?


ps. were fucked and it only took 100 years!!! 

ReactionToClosedMinds's picture

highly recommend the Michael Pettis book, The Great Rebalancing.  Superb from many levels. Early chapters are slow & technical as he seems focused on establishing his academic & theoretical bona fides.  But as soon as he switches into current China practically the book takes off.

Personally, I always thought part of the issue at present is capital flows imbalances due to out-dated & increasingly steroidal mercantile policies of Asia and even Germany now.  USA has served as the great buffer for many laudable reasons for post-WW@ econ security purposes at the sacrifice of the comparatively well-off US citizenry.  But whether you are an optimist, idealist, pessimist or realist ..... it is clear there is  a serious problem afoot..........something your conflcited 'wealth advisor' (i.e., in olden days ----- a stock broker) will never want to adequately convey to you as it will scare the wits out of any pragmatic person.

There is more of course, but no credible person can ignore Pettis' warnings which, as politically correct and careful as he words his concerns, comes very close to this ZH feature.......................with the understanding, unstated of course, that China is 10x the magnitude or more of Japan.

Is this a very slow motion re-run of the 1930s where QE and debasement attempt to buy time for an organinc econ recovery?  Many view that the depression did not end until WW2 started with US involvement in December 1942 per Pearl Harbor.  If you study the conditions of 1929, methinks it is clear that present conditions are actually worse. But then again, the depression DID NOT START with the 1029 equity crash as less than 5% of US populace traded equities.  The 1931 Fall bank run crisis which began in Europe from hot debt money repatriation is what started depression.   But I'll wager more academics than nto do not even know this or kn0ow it sufficiently


earleflorida's picture

nice stuff!

lets go back to 1914-1919/22 and 'this' --'treaty of versailles' (wwi) regarding the failed 'league of nations' in which wilson, cabot lodge, and james reed stonewalled and then eviscerated toally. please note that japan, germany, and china... not to mention prussia, austria, russia, and poland (never ending, even to this day?) were never ever ending animosity towards one another? france and england both eded up in debt to usa! but the germans were cremated for nearly 20 years!


as far as japan getting involved in wwi and wwii, it was all about the future for america's insatiable appetite for world dominion... and that meant having complete control of the pacific and indian ocean.


ps. only use wikipedia because it has turned into a pretty reliable goto ( and quick site for reference) when only a brief overview is required.

CrazyCooter's picture

Your 21 link was ambiguous. Did you mean ...

That is a happy looking ambassador!



Leraconteur's picture

Likely to happen? Yes.

Still waiting. Chinese have only one value - Money is a God - everything else is secondary.

So if things get bad they will simply work harder, longer, and cheap-out even more.

If the debt gets too large, they will SIV it as in 1999 and tell the peasants to load up again.

...which the peasants will obediently do...

user2011's picture

I am not sure China will follow what Japan had gone through.   Much of China is still a third world country.    Many of the people there are very poor.   Many Chinese have ventured to other parts of the world to look for opportunities.   Regardless how well they do, they will send money and materials back to their family and relatives in China.    And more and more Chinese are leaving their homeland for education and jobs.    China still has a lot of manufacturing capability.   As long as they got some ideas, they can turn it on a dime.     One more thing, the communists government can really make the call and make resources available, if they wish to. Not a whole lot of red tape, if those communists know what they should be doing..

laomei's picture

Japan's lost decade(s) were primarily due to them agreeing to the Plaza Accord, which was just about the dumbest move they could make.  The crux of it was to allow the yen to appreciate, reducing the trade imbalance and basically more than doubling their official GDP.  Possibly the most retarded thing they could have done, as all it accomplished was decimation of their economy in favor of fake economical numbers.  It nuked their export sector, forcing it to rely on Chinese manufacturing and shifting rapidly up the value chain, which further cut jobs.  It's no coincidence that that's when they started their over-enthusiastic development... We're talking things like highways next to empty highways and bridges next to unused bridges, all of it conveniently controlled by the yakuza who gained excessive power through it and resulting in the conditions you see now, of make-work jobs like "stationing 2-3 workers next to an uncovered manhole" not because they are working on it that day, but because someone might work on it later that week.  


Their property bubble was based on that rampant appreciation and development which caused property values to skyrocket.  And what did they do with all that new found money? They pissed it away on garbage.  Their domestic auto industry is propped up by Shaken and rapid depreciation of autos.  Their housing is built so shoddy that you're looking at tear-down in 20 years and selling a house is under the assumption that it will be torn down and rebuilt.  They don't have the youth anymore, it's all olds who just refuse to die and suck the coffers dry.  The youth are not having kids like they used to, and there really isn't much in the way of hope.  Thanks Plaza Accord.


China is going a bit crazy on infrastructure, sure.  But in most places it is DESPERATELY NEEDED.  HSR is quickly filling to capacity, subway lines are used to capacity basically as soon as they are opened.  Highways ditto.  Simultaneously we see the narratives of: massive traffic jams, jammed subways, crowded buses, constant flight delays due to over-capacity airports, impossibility to get train tickets during the holidays, etc.  As well as the bullshit propaganda claiming that the HSR is unused, too many highways, crazy subway building, empty developments, too many airports being built, etc.

Well guess what? YOU CAN'T HAVE IT BOTH WAYS.  Sorry, you just simply can't.  It doesn't work that way because one of those sides must obviously be wrong.  Seeing as I live here and have lived here for going on half my life, it's not the latter.  Debts, we're talking about debts basically owed to the government by the government.  It's meaningless drivel.  Hyping up that the rate has gone from 6.05 to 6.11... also, meaningless drivel.  Guess what, they are simply scaring away the hot money by reminding everyone that the rate can in fact go both ways.  Kinda like that liquidity shock was entirely manufactured to scare the private banks straight, while giving some extra profit to the state owned.


In summary, stop the baseless speculation that China is anything like Japan, it just simply is not in any way shape or form.

search's picture

Geez, i don't agree at all. The traffic jams and filled subways are on lines between major hubs. These were solid projects built a while ago, which have paid for themselves.

thestarl's picture

Going forward where's the cheap OIL,parties over man.

search's picture

And in regards to the Yuan, don't you think they're trying to cut off a source of funding to the shadow banking system by introducing vol to the USD carry? Trying to make it more expensive...

Fred123's picture

You are correct, attempting to compare China to Japan is absurd. Japan has a very stable, tightly knit society that looks out for Japan thus can withstand many shocks that would destroy other countries. China is inherently unstable with a society that is more tribal than nationalistic. Shocks to this type of society can be much more damaging to the country leading to possible revolution and breakup. As for the Chinese infrastructure, I willing to bet 90% of it will deteriorate within a few years, especially with heavy use. China will simple not have the money and will be forced to use slave labor, just like in the old days. With China, nothing has changed except for a few pretty buildings and a railroad that will stop working after a few years.

laomei's picture

Fairly wrong on that account.  China loves in-fighting, it's true, but ya ain't gonna be seeing revolution or break-up.  Didn't see that in the late 50s, didn't see that in the 60s or 70s either.  Not gonna see it now.  The infrastructure... there is a hilarious misconception frequently made.  The crap is built by private companies.  Anything of any real importance is done by the state owned enterprises, and it's done to amazing quality standards.  When you see those stories of bridges collapsing, yes, that's what happens when a convoy of 100+ ton trucks decide to ignore the weight limits day after day.  How many bridges in the US can you drive a single 100 ton truck over without it imploding? I'm gonna assume 0.

Fred123's picture

Things in China are far different than they were in the 50's, 60's, and the 70's. The people have seen a taste of the better life and they want it.

Hilarious misconception? I would guess that anything done by the state is far worse than by the private companies, afterall, where do the gov't officials make most of their money on this planet? Thru gov't projects. Also considering the asian habit of not doing maintenance until something is broken will only lead to a quicken of the deterioration of their grand projects. Prepare to be amused.

tony bonn's picture

china is different than japan....the chinese demographics are less problematic and more importantly the chinese have converted their worthless usa debt into gold....the chinese gold horde is fabulously larger than gold ever went east to japan....but london's and new york's gold cupboards are emptier than old mother hubbard's because they have sent nearly every last ounce - most of stolen - to the chinese. gold is valued 1/10 what it will be in a few short years.

Iam Yue2's picture

Headline grabbing group think. When China blows up, there will be no comparison, even George Magnus will be lost for one hundred and forty word superlatives.

katchum's picture

Instead of comparing share price, compare the P/E ratios.

medium giraffe's picture

A lost decade is pretty much best case scenario I would have thought.

Fred123's picture

Oh no, this can't happen because the Chinese are sooooo smart! I've gotten to know several Chinese and they are by far the most ignorant educated people I have ever met. They are not stupid, they just have no grasp of their own history much less world history and I guarantee you they will make the same mistakes that they have before. But this time will be the grandest of all. Only when they crash and burn will the begin to realize what has happened and you can bet that the ones at the top know this. That is why they are stashing trillions offshore, like a good Chinaman always does. Eff the country, I've got mine.

Itchy and Scratchy's picture

'I think I'm turning Japanese'