'China faces the 'greatest bubble' in history'

'China faces the 'greatest bubble' in history' 18 Mar 2010, 0300 hrs IST, Bloomberg

HONG KONG: China is in the midst of “the greatest bubble in history,” said James Rickards, former general counsel of hedge fund Long-Term More on Financial crisis Lighter side of recession Top 10 US bankruptcies Where has US bailout money gone? Capital Management. The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at consulting firm Omnis. “As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,” Rickards said at the Asset Allocation Summit Asia 2010 organised by Terrapinn in Hong Kong on Tuesday. China “is a bubble waiting to burst.” Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s economy. The government has raised banks’ reserve requirements twice this year after economic growth accelerated and property prices rallied. China has pegged the yuan to the dollar since July 2008 to help exporters weather the global recession. The central bank buys dollars and sells its own currency to prevent the yuan strengthening, driving foreign-exchange reserves to a world-record $2.4 trillion as of December. The Shanghai Composite Index of stocks jumped 80% last year and property prices rose at the fastest pace in almost two years in February, helped by a record 9.59 trillion yuan ($1.4 trillion) of new loans in 2009. Also Read  → China unyielding on yuan as US raises pressure  → World Bank says China should grow 9.5 pc in 2010  → Yuan appreciation: Will China listen?  → World Bank urges China to let currency rise  → Time for China to revalue yuan: US Treasury official ‘MASSIVE STIMULUS’  The World Bank indicated on Wednesday that China should raise interest rates to help contain the risk of a property bubble and allow a stronger yuan to help damp inflation expectations. The nation’s “massive monetary stimulus” risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects, Washington-based World Bank said in a quarterly report on China released in Beijing. “People making comments about bubbles possibly don’t have all the facts,” HSBC Holdings chief executive officer Michael Geoghegan said in Shanghai on Tuesday. Regulators are in control of the banking industry, and have the ability to curb lending as needed, he said.  Rickards said leveraged speculation in the stock market, wasteful allocation of resources by state-owned enterprises, off-balance-sheet debt More on Financial crisis Lighter side of recession Top 10 US bankruptcies Where has US bailout money gone? through regional governments and the country’s human rights record are concerns. “Take Russia and China together, neither of them is really deserving any investment” except for short-term speculation, Rickards said. India and Brazil are two of the “real economies” among the developing countries, he said. HARD LANDING  China is poised to overtake Japan as the world’s second-largest economy this year, according to the International Monetary Fund , and Nomura Holdings forecasts it will contribute more than a third to global growth. The nation has surpassed the US as the world’s largest auto market and Germany as the No. 1 exporter. Harvard’s Rogoff said February 23 that a debt-fuelled bubble in China may trigger a regional recession within a decade, while Chanos, founder of New York-based Kynikos Associates, predicted a slump after excessive propertyinvestments. Investors Bob Doll and Antoine van Agtmael say China’s stock market isn’t a bubble. Equities will gain by the end of the year as the government takes measures to prevent the economy from overheating, Doll, BlackRock’s CIO for global equities, said. China is unlikely to face “chaos” or experience a hard landing, Van Agtmael, chairman and chief investment officer of Emerging Markets Management said . ‘VERY SOUND’  The banking industry has “very low impairment charges compared to what you’d expect this time in the cycle,” HSBC’s Geoghegan said. “I wouldn’t be surprised if there’s a gradual increase in impairments, but long term, I’m confident that the structure of the banking industry is very, very sound.” Rickards disputed an argument that China could hold US policies hostage through its Treasuries holdings. The nation remained the largest overseas owner of US debt after trimming its holdings by $5.8 billion in January to $889 billion. China will suffer massive losses if the debt was dumped, reducing the funds available in the US securities market and forcing the prices lower, he said. http://economictimes.indiatimes.com/news/international-business/China-faces-the-greatest-bubble-in-history/articleshow/5695593.cms