Is China the next Japan

China
China: Not the
Next Japan
April 2016
CAFE
MONTHLY
“Our greatest glory is not in never falling, but in rising every time we fall.”
- Confucius

MENU OF THE MONTH
The China Observers
Chua Jie Xuan
Foo Cai Yu Inez
Lam Qi Koi
Roy Yeo Fu Qiang
Tian Chang
Table of Contents
China: The Next Japan?
Our Central Theme.........................................................................................................1
China: A Crash in Sight
Over-reliance on Credit for Economic Growth...............................................................2
Growth in Property Prices Similar to Levels in Japan in 1990s ......................................3
Matching Movements in Equity Market ........................................................................4
China: A Different End in Sight
High Urbanization Potential to Stimulate Growth .........................................................5
Service Sector Growth Potential to Aid Recovery..........................................................6
Aging Population Drags Recovery ..................................................................................7
Conclusion: China Not the Next Japan
China Still has 2 Years to Go...........................................................................................8
Even If China Crashes, It will Recover.............................................................................8

2016 MONTHLY REPORT: CHINA Page | 1
COVER STORY
A steep increase in real estate prices coupled with a strong equity market rally in
China seem to resemble conditions not different from what Japan witnessed
before the start of the “Lost Decade”. As a result, economists have issued
warnings that China will be the next Japan. In this feature, we will examine the
arguments put forth by proponents of this, and point out how China will not
necessarily go down the same path as Japan.
China: The Next Japan?
Our Central Theme
China has come a long way and grown to be the second largest
economy in the world since Deng Xiaoping’s reforms in 1978.
However, the slowdown in economic growth and the rising debt in
the market in recent years have brought in a wave of uncertainty
over the economic health of China. Increases in asset prices and an
equity market rally that resemble conditions observed in Japan
before the lost decade have caused economists to put forth a theory
– China will be the next Japan.
As much as there is a possibility of a crash looming ahead for China,
our team believes that there is still 2 years to go. Furthermore, unlike
Japan, China will have the necessary infrastructure and policies to
recover from any possible crash.
This issue consists of two core segments: (1) indicators showing how
long it will be before China crashes, and (2) factors why we believe
China will be able to recover even if it were to crash.

Page | 2 2016 MONTHLY REPORT: CHINA
Over-reliance on Credit for Economic Growth
Prior to the crash in 1990, Japan accumulated a high level of debt at
around 214%. This was the result of a loose monetary policy. Similarly,
recent monetary easing in China has caused debt in China to reach levels
similar to that of Japan prior to the crash.
Graphically, it can be seen from Figure 1 that China’s Debt to GDP ratio in
2015 is at 209% and is equivalent to that of Japan in 1989, a year before
the collapse of the Japanese asset price bubble. Drawing upon this
reference, proponents may argue that given the rising trend of China’s
debt now, it is likely that China will reach the peak of the crisis by the end
of 2016, slightly lesser than a year from now.
Figure 1: Japan vs China, Corporate and Household Debt / GDP
Comparing Japan and
China’s Debt/GDP Ratio, it
seems that a crash in China
is due to occur in 2016.
COVER STORYCOVER STORY
With high credit reliance, turmoil in the equity market as well as overvalued
properties, China today does seem to possess some traits similar to Japan in the
1980s. These similarities underlie proponents’ call that China is the next Japan.
We will use these indicators to project when China will head into a crash.
Figure 1: China vs Japan, Corporate and Household Debt % of GDP
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
100
140
180
220
100
140
180
220
2007 2009 2011 2013 2015
China Japan
Source: Bank For International Settlements
1 year

COVER STORY
Figure 2: China vs Japan Asset Prices
Growth in Property Prices Similar to Levels in
Japan in 1990s
As evident in Figure 2, Japanese asset prices increased 60% to its peak in
1990 as a result of an expansionary monetary policy which financed real
estate development. The same trend is observed in China where the recent
interest rate cuts in 2015 contributed to a rise in housing prices. The growth
of the property bubble was further accelerated as the Chinese government
reduced property transaction taxes and cut down-payment requirements.
With reference to Figure 2, it can be deduced that China’s current 50%
growth in property prices is comparable to the situation of Japan in 1990, 1
year before the collapse of the asset price bubble. Going forward, the easing
requirements to buy property may contribute to further increases in China’s
property prices. With the upward trajectory of housing prices, China may
head into the peak of the crisis in 2017.
1982 1984 1986 1988 1990 1992
100
120
140
160
180
100
120
140
160
180
2005 2007 2009 2011 2013 2015 2017
China Housing Price Japan Land Price
1
year
Source: Thomson Reuters Datastream
Year2005=100
Year1982=100

Matching Movements in Equity Market
The recent market correction in 2015 for China resembles the pattern observed
in Japan in 1988. This period is highlighted in the shaded region in Figure 3
where there is a dip in the equity market after a relatively long period of
stability. Relative to their respective base years, the period saw China rise by
130% and fall 80%, whereas Japan increased by 180% and decreased by 30%.
As such, the matching movement and pattern in the equity market seems to
show that China has another 3 years to go before it crashes, assuming that it will
crash when it rises to a similar level seen in Japan in 1990.
Figure 3: Shanghai SE Index vs Nikkei 225 Index
COVER STORY
1980 1982 1984 1986 1988 1990 1992
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
2009 2011 2013 2015 2017 2019 2021
Shanghai SE Index Nikkei 225 Index
Year2009=100
Year1980=100
3 years

COVER STORY
Favourable demographic
trends and strong growth
potential serve to kick start
China’s recovery should it
crash.
COVER STORY
Despite indications that the Chinese economy may crash, further analysis shows
why China might not be the next Japan from a recovery standpoint. Unlike Japan
which has been trapped in a recession for decades, China will have significant
potential for recovery due to structural traits different from that of Japan.
High Urbanization Potential to Stimulate Growth
China’s urbanization rate today is still far below that of Japan in 1990 as
illustrated in Figure 4. At its current level of 55%, China has another 25% of
headroom to grow in terms of urbanisation to reach Japan’s level in 1990.
Such a low urbanisation rate in China represents vast potential for growth as
labour inflows into urban areas will contribute to increased consumption.
Moreover, with the lifting of Hukou restrictions which allow the relocation of
rural workers into cities, more will be able to enjoy higher wages and
education. This contributes to a higher skilled labour force and increases
production efficiency. All of the above provide opportunities for growth and
the potential to help China to recover from the recession.
Figure 4: China vs Japan Urbanisation (%)
1976 1978 1980 1982 1984 1986 1988 1990
60
65
70
75
80
20
40
60
80
100
2000 2002 2004 2006 2008 2010 2012 2014
China Japan
25%

Service Sector Growth Potential to Aid Recovery
China’s service sector remains smaller than that of Japan in 1990 as seen in
Figure 5. Compared to Japan’s service sector which made up 60% of its GDP in
1990, China’s service sector only contributes to 48% of its GDP. To reach
Japan’s level in 1990, China has another 12% to go. This provides ample room
for China’s continued growth in the service sector.
Growth in the service sector allows job creation and employment opportunities
for unskilled workers. It is also considered an indicator of economic progress.
The increasing trend highlights China’s focus of shifting labour towards the
higher value-added service sector as a key driver of future economic growth.
Figure 5: China vs Japan, % share of GDP for Service Sector
1976 1978 1980 1982 1984 1986 1988 1990
35
40
45
50
55
60
65
35
40
45
50
55
60
65
2000 2002 2004 2006 2008 2010 2012 2014
China Japan
12%

1976 1978 1980 1982 1984 1986 1988 1990
8
10
12
14
16
18
8
10
12
14
16
18
2000 2002 2004 2006 2008 2010 2012 2014
China Japan
5%
Source: The World Bank
Figure 6: China vs Japan, Dependency Ratio, Old (%)
Aging Population Drags Recovery
An aging demographic has contributed to sluggish recovery for Japan since its
crash in 1990 as it poses challenges related to declining consumption levels and
a general fall in workforce productivity. Such an aging population is seen from
the rising old age dependency ratio in Japan which measures the number of
elderly people as a share of those of working age (Figure 6).
However, an analysis of Figure 6 shows that there is a gap of approximately 5%
between China’s current old age dependency ratio, and that of Japan in 1990.
The younger demographics in China imply higher consumption and productivity
levels. Moreover, with the relaxation of the one-child policy, the dependency
ratio will not likely increase at a pace as significant as that seen in Japan post-
1990.
As a result, even if China were to suffer from an economic crash today, it
remains better positioned in avoiding the deflationary spiral seen in Japan.

COVER STORY
Indicators Years to Reach Japan’s Level
Credit Situation 1
Property Valuation 1
Equity Market 3
Average 2 (Rounded up)
Even If China Crashes, It will Recover
Assuming that China was to go into a recession, we believe that it will be able
to recover faster than Japan.
Factors Difference in Potential Compared to Japan’s Level in 1990
Urbanisation 25%
Service Sector
Growth
12%
Aging Population 5%
Japan has largely been unable to restart its economy due to underlying
structural problems that will take years to resolve. However, given China’s
current rate of urbanisation, service sector growth, and more favourable
demographics as compared to Japan, there exists potential for China to tap
on by implementing suitable economic policies to drive growth.
Conclusion: China Not the Next Japan
China Still has 2 Years to Go
Purely using Japan as a basis for comparison and assuming that the economic
crash will happen when the economic indicators reach levels seen in Japan in
1990s, our analysis shows that China will need another 2 years before it
crashes.

Contact Details
Chua Jie Xuan
Foo Cai Yu Inez
Lam Qi Koi
Roy Yeo Fu Qiang
Tian Chang
Address: Centre for Applied Financial Education (CAFE)
Nanyang Business School
Nanyang Technological University
50 Nanyang Avenue
Singapore 639798
Tel: (65) 6790-4250
Disclaimer
This report was produced by students of the Platform-Based Learning track in Banking and Finance under the
Centre for Applied Financial Education (CAFE) at the Nanyang Business School in the Nanyang Technological
University, Singapore.
This report may not be reproduced (in whole or in part) or delivered or transmitted to any other person without
prior consent from CAFE.
This report does not constitute a personal solicitation or a recommendation to buy/sell any securities or take into
account investment objectives, financial situations, or needs of the reader.
Information and opinions contained in this report are published for reference only and are not to be relied upon
as authoritative or without the reader’s own independent verification, or taken in substitution for the exercise of
judgment by the reader.
JCHUA026@e.ntu.edu.sg
IFOO001@e.ntu.edu.sg
QLAM001@e.ntu.edu.sg
RYEO004@e.ntu.edu.sg
TIAN0068@e.ntu.edu.sg

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