China is following a similar trajectory to that of Japan in the 1970s and 1980s, and of Taiwan and South Korea in the late 1980s to the 2000s. And that’s good news if you’re investing for the long haul
Stock market investors around the world are getting worried. In the United States, share prices have almost quadrupled since their low point in the depths of the financial crisis. By some valuation measures that has left stocks looking more expensive than at any other time in history, except for immediately before the great market crashes of 1929 and 2000.
On the first of those occasions, prices fell by 90 per cent over the following three years. On the second they declined 50 per cent over the next two and a half, with technology stocks falling by 80 per cent.
Investors in Chinese shares are feeling nervous too. The stocks of Chinese companies listed in Hong Kong have climbed by more than 50 per cent since early last year, driven largely by a re-rating of the shares in China’s big state banks.
Yet warnings abound that the ballooning of China’s domestic debt over the past 10 years threatens the economy with a financial crisis on a scale to match the US sub-prime crunch of 2008. And memories are fresh of the last big stock sell-off in 2015, which saw Hong Kong-listed H-shares fall by half in a little more than six months.
Whatever happens, it is a sure bet that Chinese equities will be volatile, especially given the penchant of mainlanders for momentum buying rather than investing on valuation. Nevertheless, if the history of East Asia is any guide, there are reasons to believe that Chinese stock markets will continue to rise over the coming years, in a sustained bull market that could far eclipse even the run-ups seen since early last year.
That conclusion is based on the observation that China is following a similar economic and financial trajectory to those traced by Japan in the 1970s and 1980s, and by Taiwan and South Korea from the late 1980s to the 2000s. Like its neighbours before it, in the early phase of its economic development China adopted a policy known to economists as “financial repression”. In a nutshell, the government kept a tight grip on the financial system, restricting private investment opportunities and holding interest rates artificially low to steer cheap capital into favoured industries and infrastructure projects.
