June 05, 2015

"Many observers assume that China is on a path to become the next Japan – a major economy mired in a multiyear deflationary funk that deflates its global clout."

Independent Online And it’s certainly true that the way that Beijing has been downplaying its debt problems is eerily reminiscent of Tokyo’s public relations strategy from the 1990s. By William Pesek

'But take a closer look at China’s situation, and you’ll realise a better analogy is South Korea. China’s expanding effort to pile debt risks on individual investors is straight out of Seoul’s playbook.

'South Korea’s economy crashed in 1997 under the weight of debts compiled by the country’s family-owned conglomerates. The government’s strategy for dealing with the fallout consisted of shifting the debt burden to consumers. With a blizzard of tax incentives and savvy PR, Korea shrouded the idea of amassing household debt to boost growth in patriotic terms.

'That push still haunts Korea. Today, the country’s household debt as a ratio of gross domestic product is 81 percent. That far exceeds the ratios in US, Germany and, at least for the moment, China. As a result, Korea has been particularly susceptible to downturns in the global economy, which is why the country is now veering toward deflation.

'Is China repeating Korea’s mistakes? Granted, the specific of Beijing’s economic strategy vary greatly and China’s $9.2 trillion (R113 trillion) economy is seven times bigger than Korea’s. But the Chinese government’s efforts to prod households to buy stocks and assume greater financial risks are highly reminiscent of Korean policy.

'Beijing has been encouraging everyone in the country, from the richest princelings to the poorest of peasants, to buy stocks. And China’s markets have been booming as a result: Over the past 12 months, the Shanghai exchange is up 141 percent, and the Shenzhen exchange is up 188 percent. Margin trading, which has fueled these rallies, seems to have jumped another 45 percent in May, to a total of $484 billion.'

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