We have seen lot of talk on the Chinese Bubble. But it is for real since Citi’s Chief Economists Willem Buiter [UK] and Minggao Shen [HK] just a while ago published a joint Report in the same. The main highlights of the report are,
- China avoided a prolonged downturn by aggressively expanding credit growth since the end of 2008.
- Higher reserve requirements and selective quantitative credit controls have not dampened credit growth sufficiently.
- Higher interest rates and Yuan appreciation are necessary to prevent further overheating in the real economy.
- Additional macroprudential controls are required to prevent booms and bubbles from developing in the land, property and stock markets.
- These policy measures and controls are unlikely to be implemented in time to prevent a classic asset boom, bubble and bust sequence.
Finally in conclusion they say,
Although we still seem to be in the early stages of an asset boom, bubble and bust sequence in the property and land markets, and perhaps just in the recovery stage for the stock market, it is nevertheless likely in our view that China will experience such a sequence, starting in the residential real estate market. From there it is likely to spread to the commercial real estate sector and to the stock market also.
The reason we are quite confident that a boom, bubble and bust sequence will take place in China is simple: whenever credit conditions like those seen since late 2008 in China have presented themselves in countries where the fundamentals are strong (as they are in China today), where structural change, including financial innovation, is occurring at a frenetic pace (as it is in China today), and where the monetary, regulatory and fiscal authorities are untried and untested (as they are in China today), a boom, bubble and bust sequence has occurred. This time is unlikely to be different unless the authorities in China act differently from the authorities in China and elsewhere in the past.