Will the Chinese Market Boom?

Ichiro Suzuki



On February 25, Japan’s Nikkei index closed at 59,583. It was another all time high, and was 50% higher than the once towering high of 38,914 that stood until two years go, for 33 years and 3 months. It has taken the Nikkei only two years to rise 50% once the former high at the height of the bubble era was cleared. 

When a historic bubble popped at the beginning of the 1990s, Japan went into a long period of adjustments of past excesses. A painful period lasted much, much longer than it was believed it would at the outset. Japan failed to see a paradigm shift that hit the country’s economy. Failing to face the reality, policy makers wasted time, trying to dodge hardship of necessary adjustments, which was wholesale writing-off of non-performing loans through injection of tax payers money into the banking system. It was at last done by Prime Minister

Junichiro Koizumi in the early years of the 21st century. Almost twenty years had passed before the Nikkei index had finally reached bottom. Having hit what turned out to be the bottom in early spring of 2009, it didn’t rebound sharply, instead creeping at the bottom level for three and a half years. In sharp contrast, after an epic collapse of the bubble in the roaring 1920s, the Dow Jones Industrial Average had reached bottom in three years. 

In the final quarter of 2012, almost 23 years after the lofty peak was reached, Japan’s stock market started rising, with a genuine staying power, as it turned out. Then, a little over 11 years later, the bubble’s peak was conquered at last, quintupling in its value. The market hardly looked back. By the end of two decades of relentless downward movement, albeit with occasional powerful bear market rallies, the last bear had exited the market. It was due for a durable, genuine rally, as the health of the banking system was restored.

In addition to macro adjustments, the Japanese market has been underpinned by the authority’s drive to enhance shareholders’ value. The Financial Services Authority pressed corporations hard to raise returns for shareholders from dismally low levels. What was once believed to be Corporate Japan’s virtuous practices were made unfashionable in the 2010s. Management came under pressure to use assets more efficiently, through divesting non-core businesses with low returns, and dissolving mutual shareholdings with other corporations. At the same time, the Tokyo Stock Exchange demanded corporations to raise listed companies’ price-to-book value ratios. Pressure on Corporate Japan keeps going on. Market participants are now demanding more than asset efficiency. Investors want business expansion through greater investments to drive revenue and earnings further. What has happened to Corporate Japan so far was a relatively easy part. Now management faces greater challenge to grow their business for shareholders. 

Since the last decade, China has been closely following footsteps of the post-bubble Japan, which has descended into a persisting period of stagnation. The Communist Party has scrutinized every step Japan had followed since the beginning of the 1990s so as not to repeat the same mistake. As it turned out, the CCP wasn’t truly determined to make tough decisions that might be unpopular at the outset. The Chinese economy descended into marked economic slowdown and mild deflation after a frenetic period of double-digit economic growth was over. China has failed to make structural adjustments for a different age. 

China’s stock market fell hard from the peak in October 2007,  on the eve of the global financial crisis in 2007-09. Unlike Japan’s bubble collapse experience, the Shanghai market didn’t spend twenty years to find its bottom. It was reached in the spring of 2009, along with the U.S. market. After all, the financial market meltdown was a global event. China’s recovery process since then, however, is painfully slow. Sixteen years after hitting the bottom, the Shanghai market is still full one-third below where it stood in October 2007. Insufficient structural adjustments have been weighing on the economy and hence the market.The CCP might have lost interest in fixing the problem. Nonetheless, time is going to to take care of it eventually, though it will be ‘later rather sooner’ before the economy fully heals.. 

The Shanghai market can have a powerful rally one day with a prospect of getting mild deflation behind. Getting a persisting problem under control is an overwhelmingly positive factor. This macro factor alone, however, will not make a bull market a genuinely lasting trend. As it happened in Japan the last ten years and more recently in South Korea in 2025, relentless drive to make corporations attractive to investors give durability to a rally through enhanced valuation. The Shanghai market is struggling in part because of Corporate China’s lack of appeal to market participants. They have been mired in rampant low profitability amid cutthroat competition. Though China has ceased to be a favorite destination for foreign capital, excessive amount of capital continues to flow into technology and manufacturing sectors because of Beijing and local governments’ desire to promote them. Subsidies lower hurdle rates for corporations, resulting in rampant overcapacity, which in turn exerts downward pressure on prices. 

Having realized this vicious circle, Beijing is calling for more disciplined investments, but will the industries listen? While Beijing may tighten its purse, local governments are likely to continue subsiding them in order to keep factories and R&D centers in their region. Worse, under CCP pressure in recent years, Corporate China is focused on flattering the Party so as not to repeat the misfortune of Jack Ma and Alibaba. They may want to serve shareholders but the government is the first shareholders to be looked after with others relegated to a secondary concern, limiting the scope of future stock same market booms. For this to change, the CCP has to issue decrees to look at ordinary shareholders not the Party, in the fashion of Japan and South Korea. This is far too much to expect from obsessively control freak CCP under Xi Jinping. 

About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.