Haitong: Insight into the Crisis of the Japanese Banking Industry in the 1990s when Bubbles were Forming.

Haitong releases research report reviewing the 90s Japanese banking crisis, which can be divided into three stages: "small and medium-sized financial institutions going bankrupt" - "housing loan and land finance crisis" - "large financial institutions going bankrupt", all closely related to the collapse of the real estate and stock market bubbles. The team believes that although the Japanese banking crisis can provide valuable references, there are many differences between the situations in China and Japan at that time: the industrial and commercial real estate prices in China have limited growth; commercial banks in China do not have cross-shareholding with non-financial enterprises, so there will not be a spiral fall in stock prices; during the period when the bubble formed in Japan, bank regulation was in its infancy, while China's banks have maintained a relatively high level of capital adequacy under a stricter and more mature regulatory framework. From the 90s to the present, private financial institutions (commercial banks and cooperative financial institutions) have always been the backbone of the financial system in Japan. The characteristics of the Japanese banking industry lie in strict division of business, industry-based finance, and decreased reliance of enterprises on banks before the bubble burst. Banks are mainly divided into five categories: city banks, regional banks, second regional banks, trust banks, and long-term credit banks. The division of business in the Japanese banking industry is not only reflected in the separation between banking and trust services, banking and securities services, but also in the separation between long-term and short-term finance, and between city banks and regional banks. The shortage of funds during the high-growth period led to the popularization of the main bank system, but as the economy matured, the dependence of enterprises on banks gradually decreased. The Japanese banking crisis in the 90s can be divided into three stages: "small and medium-sized financial institutions going bankrupt" - "housing loan and land finance crisis" - "large financial institutions going bankrupt", all closely related to the collapse of the real estate and stock market bubbles. After the housing loan and land finance crisis, the Ministry of Finance decided to share part of the losses with taxpayers, which sparked strong protests from the public, leading the Ministry of Finance to adopt a cautious attitude towards using treasury funds to assist banks in subsequent banking crises, to some extent intensifying the banking crisis. The bubble in the real estate and stock markets was caused by a combination of macroeconomic policies and micro-level behaviors. First, the pressure of the appreciation of the yen led the Japanese authorities to choose loose rather than tight macroeconomic policies during economic prosperity. Under internal and external difficulties, Japan chose the strategy of "expanding domestic demand," which promoted the development of the real estate industry and even nurtured the bubble. At the micro level, the irrational expansion of balance sheets by banks led to a large flow of credit into financial insurance, real estate, and construction industries, while the corporate sector used low-interest-rate financing for investment activities and savings arbitrage. The collapse of the bubble directly caused a severe shrinkage in asset prices and subsequent banking crises, triggering a chain reaction and leading to Japan's "lost two decades" in the economy. In China, after 2022, real estate sales prices have shown a negative growth trend, with a decrease in the balance of residential mortgage loans by the end of 2023, leading to a relatively weak real estate market. Therefore, many people compare China in 2022 to Japan in the early days of the bursting of the economic bubble in 1991. Haitong has found that despite the Japanese banking crisis providing useful references and warnings, there are many differences between the situations in China and Japan at that time. The growth of industrial and commercial real estate prices in China is limited, and the loan-to-value ratio for mortgage loans is not expected to increase significantly. Haitong believes that the default rate of mortgage loans is expected to remain low; there is no phenomenon of cross-shareholding between commercial banks and non-financial enterprises in China, so there will not be a spiral fall in stock prices; the housing loan and land finance issues in Japan planted the seeds of the banking crisis, while China has curbed the trend of loans flowing into real estate and other "virtual" sectors after the implementation of new asset management regulations; during the period when the bubble formed, bank regulation was in its infancy, and Japanese banks were not bound by the Basel Accords, while Chinese banks have maintained a relatively high level of capital adequacy under a stricter and more mature regulatory framework. Risk warning: the decline in corporate debt repayment ability, significant deterioration in asset quality; significant changes in financial regulatory policies.