Tuesday, 4 August 2009

Is china pumping up another asset bubble?

In fact you could argue that the property bubble in China never really went away but it is inflating again and this spells danger.

Andy Xie at China Digital Times rants. This is a rant and is a rather simple analysis of a complex picture but there is an element of truth in his words. It may take a lot longer that the 4th quarter of 2009 to deflate however.

Andy Xie: “Crazy Again” [China Digital Times] H/T TDWatkins

Chinese stock and property markets have bubbled up again. It was fueled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100% overvalued. The odds are that both will adjust in the fourth quarter. However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future. The bursting will happen when the US dollar becomes strong again. The catalyst could be serious inflation that forces the Fed to raise interest rate.

Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn’t enough liquidity to feed the beast.

[...] In summary, the market frenzy now won’t last long. The correction may happen in the fourth quarter. There could be another wave of frenzy next year as China can still release more liquidity. When the dollar recovers, possibly in 2012, China’s property and stock market could experience collapses like during the Asian Financial Crisis.


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