As China’s stock markets have lurched wildly, seeding dramatic falls across the world, some have drawn parallels with the global financial crisis of 2008 or the Asian version a decade earlier. They are weak comparisons.
The abrupt end of Japan’s boom in the 1990s, complete with stock crash and property bust, offers the most striking similarities, and the most valuable lessons.
China’s stocks ran up gains of 150% in about a year before the mid-June crash, supercharged by margin lending and ignoring the drumbeat of disappointing economic data.
That makes for facile comparisons with 2008, the most recent example of a credit-fuelled bubble.
But there was no trigger like US authorities’ shock decision to let Lehman Brothers, at the heart of the global banking system, collapse in 2008.
“If you look at the extremes in the equity market they are almost comparable with the Lehman days. In those days we had a trigger, a real event, something clearly defined,” said Christian Lenk, rate strategist at DZ Bank in Frankfurt, on Tuesday.
“What we saw yesterday was ongoing fears about China ... but there was no trigger, so we see a bit of normalisation today.”
And it was no surprise that China’s stock bull run, like its property bubble a year earlier, came to an end, Japanese Finance Minister Taro Aso said this week.
The anatomy of the Asian financial crisis was also quite different, as hot money deserted a region with high foreign debt and trade deficits and currencies they couldn’t support.
“There are few similarities to the Asian crisis in 1997 and 1998, which was driven more by large deficits in trade accounts,” said John Vail, chief global strategist at Nikko Asset Management in New York.
“What we’re seeing now is more of a rapid change in sentiment around the world,” he said.
The comparisons between China now and Japan in the 1990s, however, are striking.
Like Japan then, China was trying to cool frothy property and equity markets.
Both economies were powered by massive investment, huge trade surpluses and overvalued currencies and were liberalising their financial sectors. China’s share of the global economy now is roughly the same as Japan’s was in 1990, about 12%.