Stock Market in China

China is the new Japan.

In the 1980s Japan could do no wrong in the eyes of the mainstream media. The country had a massive trade surplus…a high personal savings rate…and a zooming stock market.

Like China does now, Japan also had a highly speculative property market. At its height, real estate in Tokyo’s Ginza district was selling for about 100 million yen (about $1 million) per square meter.

Part of the reason property prices reached such dizzying heights was that Japanese banks were in the habit of making loans that had little or no chance of being paid back. Credit flowed easily. There were few dissenting voices in the press.

Conditions are eerily similar today in China. The country’s Communist government has pumped a huge amount of fiscal stimulus into the economy. And it has enforced a roughly 10 trillion yuan ($1.46 trillion) loan quota on banks. Property prices are spiking. And few in the mainstream media seem capable of believing that China’s government may have lost control of the country’s economic reins.

There is another historic parallel worth considering: China in 2010 is not far off the United States in 1929.

At the end of the Roaring Twenties, the U.S. was the world’s biggest creditor. China now holds that role. In the 1920s the U.S. ran an expansionist monetary policy in an attempt to help its ally Britain out of a slump. These days, much of the world is pinning its hopes for a sustained recovery on China’s regimen of loose money and fiscal spending.

Unfortunately, that’s not where the similarities end. As former Morgan Stanley chief economist for Asia-Pacific, Any Xie, points out in Business Week Chinese investors treat the country’s stock exchanges much like they would a casino—very much like American stock market investors treated the New York Stock Exchange in the 1920s.

A friend who spent much of the last decade in China working for a Swiss investment bank says the same thing. He says Chinese stock brokers’ offices look much like sports betting shops in London or Dublin—lots of men sitting on benches scribbling down numbers from a big ticker screen on the wall.

As Barron’s Alan Abelson correctly points out, bubbles aren’t difficult to spot. The checklist is ample:

• A compelling growth story
• Blind faith in the competence of the authorities
• Excessive capital investment
• A surge in corruption
• Easy money
• Fixed currency regimes
• Rampant credit growth
• Moral hazard
• Precarious financial structures
• Rapidly rising property prices powered by dodgy loans

As we now know, the U.S. under the Bush administration checked most of these boxes. China checks all of them.

If history is any judge, this won’t end well.