China's Turmoil Could be Just a Blip, If 1960s Japan Is a Guide

  • "The parallel with the 1960s is more meaningful" for China
  • Japan's interventions seen to have averted financial meltdown

China’s economic slowdown and market crash often evoke comparisons with Japan’s bust in the 1990s, a period that saw the world’s second-largest economy of the time tip into prolonged stagnation.

Both economies experienced rapid, debt-fueled growth that spurred soaring real estate prices and stock market bubbles. Japan’s run-up eventually ended in a hard landing that the country is still recovering from. The argument says China could end up suffering a similar fate.

Yet a more apt parallel may instead be its neighbor’s experience of the 1960s. That’s according to Paul Sheard, chief global economist at ratings company Standard & Poor’s in New York, who worked in Japan between 1976 and 2006.

The history shows a number of similarities, and augurs for an ultimately benign outcome for China’s stocks and the economy, though not without the need for patience and a sustained effort by policy makers.

Here’s what happened: The Japanese economy soared in the build-up to the 1964 Tokyo Olympics as new highways and bullet-train lines were rolled out and factories were set up amid a construction boom. The stock market went on a roller-coaster ride as growth boomed then slowed, and got walloped when policy makers tightened credit.

After a big sell-off in 1963, authorities intervened. In 1964 and 1965, two entities were established to prop up the market, documents compiled by the Bank of Japan show. Commercial banks helped fund the first vehicle, which spent 193.6 billion yen on shares, with the central bank pitching in after their money ran out. The second vehicle bought another 234.9 billion yen, with the BOJ shouldering 95 percent of the cost.

The interventions, which according to research cited in a National Bureau of Economic Research paper amounted to about 6 percent of the market, eventually worked. Shares began to rally, and economic development continued apace.

“It turned out to be a superb move because it prevented a financial depression,” said Hiroshi Takeuchi, 84, a professor of economics at the University of Shizuoka in central Japan. “Once things settled, a new wave of economic growth started.”

It’s a strategy China may be hoping to emulate. After Shanghai stocks gained about 150 percent in the year to June 12, a meltdown since has wiped out around $5 trillion in shareholder value. The turmoil forced the government to intervene by banning major shareholders from selling stakes, suspending new listings and asking brokerages to help boost the market backed by the central bank, among other measures. Japan took several of the same steps.

Chinese officials in recent days have said they believe the stock market turmoil is over and that state intervention has worked.

Like Japan five decades earlier, China is still at a middling stage of economic development, meaning the economy has significant room to grow.

"The parallel with the 1960s is more meaningful," said David Mann, chief Asia economist at Standard Chartered Plc in Singapore. "Starting from the fact that China today still only has one fifth of the capital stock per worker that the U.S. or Japan has today tells us that there is plenty more efficient and productive investment yet to be done in China."

Comparisons only go so far. China is facing a shrinking labor force, quite different to Japan in the 1960s. China’s economy is also more open than Japan’s was then, leaving it vulnerable to capital outflows that are now complicating its exchange-rate policy.

Still, like Japan in the 1960s, China is experiencing a rapid upgrading of its industrial infrastructure and its capital markets are growing in global prominence, said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong.

"On the basis of Japan’s experience, China’s current travails may turn out to be a mere blip on the path to prosperity," Neumann said.

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