When financial crisis devastated its Asian
neighbors a decade ago, China sat safely on the sidelines, its
own markets and banks largely closed off from the world and
insulated from the upheavals wracking more open economies.
But today, China could be ripe for a crisis of
its own that might resemble the collapse of Japan's "Bubble
Economy" in the early 1990s -- and have enormous global impact,
analysts warn.
Just as in Japan at that time, stock and
property prices here are soaring. Banks have lent billions to
build malls, office towers and apartment buildings -- although
many remain unfilled.
Authorities warn the economy may be
overheating and are taking steps to cool investment and lending,
but to little avail. An attempt in late May to rein in surging
stock prices sent shares tumbling for a couple of days before
they resumed their climb.
The likely trigger of a crisis, should it
erupt, would be a pile-up of bad loans in a weak banking system,
analysts say. "The banking system is still based on collateral
and the collateral is all overvalued," says Andy Xie, an
independent economist based in Shanghai and Hong Kong.
"If the bubble bursts, then you will have a
banking crisis like Japan in 1990," he says. "The question is
how China can manage after the bubble."
Given China's growing role in global
manufacturing, financial markets and commodities, the
repercussions of such a collapse would be far-reaching.
While there are differences between Japan's
asset price bubble and China's situation today, the similarities
are instructive.
Easy money from Japan's banks led to an
estimated $3 trillion in investment in new plants, hotels and a
glut of golf courses. Real estate prices soared.
Domestic investors piled into stocks, seeking
higher returns than the paltry interest paid on savings
accounts. The value of the Tokyo stocks soared from $2.6
trillion in late 1987 to $4.5 trillion at the market's peak in
late 1989.
When the orgy of speculative trading collapsed
after the Bank of Japan tightened monetary policy, a decade-long
slowdown ensued.
In China today, many of the same factors are
also at work -- low returns on bank savings, cheap capital,
soaring stock prices and relentlessly surging property prices.
In just two years, the value of shares traded in Shanghai and
Shenzhen has skyrocketed to about $2.2 trillion from $393
billion.
"China is like a giant elephant riding a
bicycle -- it has to maintain a fast speed, otherwise it will
crash," economist Zhang Chunyue quipped in a recent commentary
in the state-run newspaper China Daily.
"In the case of China you can make a very
plausible case that we have all the conditions for a serious
crisis when there's an adverse shock," Pettis says. "There's a
lot more debt out there than we think."
