New York Times columnist and “World is Flat” author Thomas Friedman, makes the point in his that while China is certainly exhibiting signs of over-inflated markets, he wouldn’t want to bet against it too soon.
China has gazillions of dollars in the bank, and just as in poker, betting against the richest man at the table is always a losing venture.
China also is quite astute. It knows it has bubbles in its property and equity markets but it also has the political power and determination to do something about it.
When the global economy looked ready to collapse, China initiated the biggest stimulus program ever to buttress its growth. That led to inflation (expected to reach 4% by year end) and bubbles in the real estate and stock markets.
Recognizing this, China yesterday told its banks to increase their reserves and reduce their lending. This will make it more expensive for borrowers, many of whom must have read the “Florida Flippers Guide to Real Estate”. Condo prices in Beijing have “doubled and tripled” in the last 12 months to about US$400 a square foot, according to a Bloomberg article.
The reserves announcement also suggests that China will end its fiscal stimulus program sooner rather than later.
That sent Chinese stock markets (which doubled in value in 2009) for a sharp tumble yesterday.
China also said the other day that it is going to gradually allow short-selling and margin trading in its stock markets. And there is speculation that it will allow foreigners to trade in its local stock markets within a couple of years. (Foreigners have been restricted to trading in only a sub-set of the stock market, causing artifically high prices and high volatility. Ditto for the local stocks as local investors can’t invest outside.) These changes should help bring more realistic valuations to Chinese stock markets.
As Krugman said, these are all signs that the Chinese leadership is proactively dealing with at least some of its problems.
As for investing in China – great idea. But just wait until some of the air is let out of the bubbles before getting into the SPDR S&P China ETF (GXC).
As always, your comments are welcome.