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What China Can Learn From Japan
11/25/2009 12:05 pm EST
Twenty years ago, there was no doubt as to which Asian power would soon rule the Earth. Japan's economy was growing at 6% and its unbeatable exporters had racked up a record current account surplus. The stock market, which was about to peak at four times its current level, was the envy of the world. Tokyo real estate was unaffordable to all but the favored clients of the bloated local banks. Japanese investors were on a notorious shopping spree in the US, acquiring such trophies as Columbia Pictures, Rockefeller Center, and the Pebble Beach golf course.
Fast forward to the present, and Japan’s stock market is one of the world's weakest in a fair reflection of the Japanese economy's struggles over the past two decades. The untried government that recently ended 50 years of rule by the Liberal Democrats fears that spending double next year's tax revenue may not be enough to end persistent deflation, and has been prodding the reluctant Bank of Japan to commit to buying more bonds.
As China contemplates its neighbor's downfall, what lessons should it draw about its own future? Will it be the notion that, in the long run, export-driven growth doesn't pay? Or the more pragmatic observation that one of the major differences between the samurai superpower of 1989 and the aging spendthrift of today is that the value of the yen against the dollar has nearly doubled?
The answer this week came from a deputy foreign minister who said China planned to keep the yuan "basically stable around reasonable, balanced levels," meaning little, if any, appreciation against the dollar in a continuation of its long-term peg.
Foreign pressure on China to let its currency rise has threatened to flood local asset markets with hot foreign money. Combined with the rebounding dollar earnings of Chinese exporters and a flood of new loans made by Chinese banks this year, the capital inflows could stoke inflation and inflate bubbles.
It was in this context that China's top banking regulator roiled the Shanghai and Hong Kong markets Tuesday by warning that top Chinese banks could be forced to raise more capital. But talk is cheap and Chinese stocks are not, and by Wednesday, Shanghai had recovered more than half the prior day's loss, once again approaching multi-month highs.
Chinese leaders have said repeatedly that the recovery now underway is not secure, implying no abrupt withdrawal of their huge domestic stimulus and no major currency revaluation. To ward off inflation and hot money inflows, they seem content to tinker on the margins, as with the new rules discouraging currency speculation by Chinese nationals.
Meanwhile, in contrast to President Obama's coolly polite reception in Beijing, India's prime minister was welcomed warmly Tuesday at the White House. India's top mutinational, Reliance Industries (Mumbai: RELI), underscored the country's growing financial heft Monday with a bid of up to $12 billion for bankrupt Luxembourg-based chemicals giant LyondellBasell. India's central bank, which had already set the gold market ablaze with its recent purchase of 200 tons of bullion from IMF, is reportedly in the market for more.
Lawrence Roulston argues in this week's Global Strategies that gold is responding, in part, to foreign distrust of the US financial system in the wake of accounting scandals, deficit-financed wars, the housing collapse, and regulatory failures that let the likes of Bernie Madoff run wild. With Europe and Japan struggling and China unable or unwilling to step up, all fiat currencies are losing ground to the more tangible stores of value.
But skeptics who spy bubbles everywhere must wonder how so many Canadian energy trusts can pay reliable double-digit dividends, with scope for much more based on their proven reserves. Roger Conrad picks several that could be acquisition targets as the sector consolidates ahead of mandated conversion to corporate status.
And Andrew McHattie highlights a London fund investing in Macau property that was selling well below its net asset value as of June. Those assets are likely to have appreciated since, though Macau's residential market has been left behind by the real estate boom gripping Hong Kong and parts of the mainland.
This column's consistent message since April has been that dips in global equities and commodities ought to be bought, not because the dollar or the US are doomed, but because other parts of the world are on the rise. Those who would measure national progress by the strength of currency must think Japan is still living it up.
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