Will China Follow Japan’s Fate?

History repeats itself, but nothing happens the same way twice.

This is certainly true for the investment markets. I often use history as a guide, but I also keep in mind there will never be a perfect repeat of the past.

Like with wars

When I hear market analysis, I am often reminded of historical commentary on conflicts and wars. No two military conflicts have ever been exactly the same, but there is also a lot that can be learned from the past. Many said the War in Iraq would be another Vietnam. There are certainly some striking historical similarities, but there are also some key historical differences such as terrain, technology, religion, etc., so a perfect parallel is not possible.

Similarly, there have been many parallels drawn between the the Great Depression and the Banking Crisis that kicked off in 2008. It’s true, there are many similarities, but there are also enough differences that it won’t play out exactly the same.

Is China like Japan?

Although Japan is one of the richest economies in the world, its stock market has struggled over the last 22 years, racking up one of history’s most notable stretches of flat to negative returns. Here is a chart of the MSCI Japan index (dividends are included in the return) since January 1, 1990. Returns are still negative.

JAPAN

There are some similarities between China and Japan, but not too many

Like Japan in the 1970s and 1980s, the Chinese government has substantial control over the economy and has used this power to stimulate growth. Like Japan, growth in the Chinese market brought rhetoric in the US to a level of paranoia over another country “taking over.” Finally, like Japan, no economy or stock market goes up all the time. Everyone has their slowdowns and their crashes. China’s stock market returns have been poor over the last three years.

The differences are vast

Despite those similarities, I am convinced that the China story over the next 20 years will be nothing like the Japanese story for the 20 years following 1990. China’s demographics are completely different. Its culture is much more heterogeneous. Its land and natural resource situation is vastly different from Japan’s mountainous islands. Perhaps most importantly, China’s current level of economic development, relative to the rest of the world, gives it much more room to further develop than did Japan’s in 1990s.

These are just a few differences. There are many more.

With regards to the investment markets, there is the truism that “what goes up must eventually come down,” but aside from that, I don’t see China’s future following Japan’s in the least.

Photo by Nicolas de Camaret

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