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China Asset Bubbles Will Burst on Inflation, Xie Says (Update2)
By Shiyin Chen
Dec. 18 (Bloomberg) -- China’s property and stock markets are a “bubble” that will burst when inflation accelerates in 2011, former Morgan Stanley chief Asian economist Andy Xie said.
“China’s asset markets are a ponzi scheme,” Xie, now an independent economist based in Shanghai, said in an interview in Hong Kong. “Property is heading for one huge bust that will take a year and a half to unfold.”
The benchmark Shanghai Composite Index tumbled 2.1 percent today, led by a plunge in property shares including China Vanke Co., the biggest developer. A measure of real estate stocks fell 9.3 percent this week, the most since August, on concern the government will step up measures to curb property speculation.
Chinese residential prices climbed last month at the fastest pace since July 2008, spurred by China’s 4 trillion yuan ($586 billion) stimulus package and record lending. The Shanghai Composite has gained 71 percent this year, while the 15 real- estate shares on the MSCI China Index have risen by more than 90 percent on average.
“It’s a less glamorous version of the Greenspan bubble and the story will end with inflation,” Xie said, referring to former Federal Reserve Chairman Alan Greenspan, who was once regarded by some observers as the greatest central banker and has seen his legacy criticized since the U.S. subprime-mortgage market collapsed in 2007.
Interest Rates
Economists estimate China’s interest rates may increase 54 basis points in the second half of next year, Bloomberg data show. One basis point is 0.01 percent. Borrowing costs may climb 54 basis points to 81 basis points in the second quarter, according to Gabriel Gondard, Shanghai-based deputy chief investment officer at Fortune SGAM Fund Management Co., which oversees about $7.2 billion in assets.
A central bank survey this week showed almost half of Chinese view inflation as excessive, contrasting with government figures showing that consumer prices have fallen for most of this year. On Dec. 11, the government announced that consumer prices climbed 0.6 percent in November from a year earlier, snapping a nine-month run of deflation. Prices will stay largely stable and the chances of significant inflation next year are not big, the nation’s top economic planning agency said Dec. 14.
“Inflation is a concern,” Mark Konyn, who helps oversee about $12 billion as chief executive officer in Hong Kong at RCM Asia Pacific Ltd., said in an interview yesterday. “It will be an issue in 2010.”
‘Struggle’
In the shorter term, China’s yuan-denominated stocks may “struggle” in the next three to four months before staging a rally that may help the market exceed its 2009 highs as banks resume lending, Xie, who correctly predicted in April 2007 that China’s equities would tumble, told Bloomberg Television.
The Shanghai Composite, tracking the larger of China’s two stock exchanges, has fallen 10 percent from this year’s Aug. 4 peak of 3,471.44.
Poly Real Estate, China’s second-largest developer, plunged 7.5 percent to 21.88 yuan today, its ninth straight loss. China Vanke dropped 6 percent to 10.59 yuan, the most since Sept. 30.
Property stocks slumped this week after the Xinhua News Agency reported the government will target “excessive” growth in property prices in some cities. That follows the cabinet’s statement last week that it will re-impose a sales tax on homes sold within five years, after cutting the period to two years in January. Even after this week’s retreat, the measure of property shares has gained 99 percent, the second-best performer among the gauge’s 10 industry groups.
New Highs?
“Markets are going to struggle in the next three to four months and then afterwards, China’s lending policy may help it along in the second half,” he said. “It’s possible that the A- share market may make a new high in terms relative to the Aug. 4 high this year.”
Xie said today that Hong Kong stocks are also about 30 percent “overvalued” and may face a “major correction” in the next four to five months as the market factors in a possible stimulus exit by the Fed. The market may recover in the second half, he predicted.
Morgan Stanley, Xie’s former employer, said this week that China’s stock market is headed for a “boom and bust” in 2010 because a rally in the first half may stall as inflation accelerates and the government withdraws some stimulus. The brokerage predicted that the MSCI China Index may rise to 81.7 next year, 29 percent higher than yesterday’s close.
To contact the reporter on this story: Shiyin Chen in Singapore at [email protected]
Last Updated: December 18, 2009 03:10 EST
By Shiyin Chen
Dec. 18 (Bloomberg) -- China’s property and stock markets are a “bubble” that will burst when inflation accelerates in 2011, former Morgan Stanley chief Asian economist Andy Xie said.
“China’s asset markets are a ponzi scheme,” Xie, now an independent economist based in Shanghai, said in an interview in Hong Kong. “Property is heading for one huge bust that will take a year and a half to unfold.”
The benchmark Shanghai Composite Index tumbled 2.1 percent today, led by a plunge in property shares including China Vanke Co., the biggest developer. A measure of real estate stocks fell 9.3 percent this week, the most since August, on concern the government will step up measures to curb property speculation.
Chinese residential prices climbed last month at the fastest pace since July 2008, spurred by China’s 4 trillion yuan ($586 billion) stimulus package and record lending. The Shanghai Composite has gained 71 percent this year, while the 15 real- estate shares on the MSCI China Index have risen by more than 90 percent on average.
“It’s a less glamorous version of the Greenspan bubble and the story will end with inflation,” Xie said, referring to former Federal Reserve Chairman Alan Greenspan, who was once regarded by some observers as the greatest central banker and has seen his legacy criticized since the U.S. subprime-mortgage market collapsed in 2007.
Interest Rates
Economists estimate China’s interest rates may increase 54 basis points in the second half of next year, Bloomberg data show. One basis point is 0.01 percent. Borrowing costs may climb 54 basis points to 81 basis points in the second quarter, according to Gabriel Gondard, Shanghai-based deputy chief investment officer at Fortune SGAM Fund Management Co., which oversees about $7.2 billion in assets.
A central bank survey this week showed almost half of Chinese view inflation as excessive, contrasting with government figures showing that consumer prices have fallen for most of this year. On Dec. 11, the government announced that consumer prices climbed 0.6 percent in November from a year earlier, snapping a nine-month run of deflation. Prices will stay largely stable and the chances of significant inflation next year are not big, the nation’s top economic planning agency said Dec. 14.
“Inflation is a concern,” Mark Konyn, who helps oversee about $12 billion as chief executive officer in Hong Kong at RCM Asia Pacific Ltd., said in an interview yesterday. “It will be an issue in 2010.”
‘Struggle’
In the shorter term, China’s yuan-denominated stocks may “struggle” in the next three to four months before staging a rally that may help the market exceed its 2009 highs as banks resume lending, Xie, who correctly predicted in April 2007 that China’s equities would tumble, told Bloomberg Television.
The Shanghai Composite, tracking the larger of China’s two stock exchanges, has fallen 10 percent from this year’s Aug. 4 peak of 3,471.44.
Poly Real Estate, China’s second-largest developer, plunged 7.5 percent to 21.88 yuan today, its ninth straight loss. China Vanke dropped 6 percent to 10.59 yuan, the most since Sept. 30.
Property stocks slumped this week after the Xinhua News Agency reported the government will target “excessive” growth in property prices in some cities. That follows the cabinet’s statement last week that it will re-impose a sales tax on homes sold within five years, after cutting the period to two years in January. Even after this week’s retreat, the measure of property shares has gained 99 percent, the second-best performer among the gauge’s 10 industry groups.
New Highs?
“Markets are going to struggle in the next three to four months and then afterwards, China’s lending policy may help it along in the second half,” he said. “It’s possible that the A- share market may make a new high in terms relative to the Aug. 4 high this year.”
Xie said today that Hong Kong stocks are also about 30 percent “overvalued” and may face a “major correction” in the next four to five months as the market factors in a possible stimulus exit by the Fed. The market may recover in the second half, he predicted.
Morgan Stanley, Xie’s former employer, said this week that China’s stock market is headed for a “boom and bust” in 2010 because a rally in the first half may stall as inflation accelerates and the government withdraws some stimulus. The brokerage predicted that the MSCI China Index may rise to 81.7 next year, 29 percent higher than yesterday’s close.
To contact the reporter on this story: Shiyin Chen in Singapore at [email protected]
Last Updated: December 18, 2009 03:10 EST
