China Slowdown: Are There Lessons From Japan?

I have been wondering for some time whether there might be clues in the future trajectory of the Chinese economy & stock-markets in the behaviour of other large economies that have emerged since World War II. As neighbours, Japan seemed like the obvious starting point.

I started off by looking at both countries’ GDP Deflators & Nominal GDP per Capita against local equity market performance. I used data from the excellent Quandl service.

From 1952 to 1980, Japanese nominal GDP per capita grew at an annual average rate of 12.8%, ranging from around 5% to 20% per year. The Nikkei index pretty much tracked this, growing 11.2% per year. What’s interesting is the next part. In the 1980s, Japanese growth slowed dramatically, averaging 5.7% per year; yet the Nikkei surged ahead gaining an average 19.5% annually.

So what was happening, and could this pattern repeat in China?

One thought was that it might have been spurred by an increase in consumer expenditure. Yet the data suggest that as a proportion of GDP, this element grew only from about 48.6% in 1970 to a peak of 56.1% in 1983 before falling back slightly towards the end of the 1980s. Likewise government expenditure grew only slightly (from 10.7% to around 14%). The one indicator that appeared to track the explosive growth of equity prices through the 1980s was the proportion of the economy represented by the Service Sector. This rose steadily from 29% in 1974 to 39% fifteen years later (the year the stock market in Japan peaked), even as manufacturing growth slowed almost to nothing.

So, back to China. Over the past couple of decades, Chinese equity markets have tracked nominal GDP per capita pretty well:

And where’s China’s service sector? Right around the level of Japan’s in 1974… So is it possible that overall growth rates in China might slow but the equity market could grow? Based on the evidence of Japan, I’d say it was entirely plausible.


This article first appeared on LinkedIn 9 September 2015