What Happens In China Doesn’t Stay In China
Greenspan Worried Shanghai Will Burst
U.S. stocks sold off Wednesday afternoon after former Fed Chairman Alan Greenspan said he was concerned Chinese stocks may undergo a “dramatic contraction.” The Dow industrials lost 83 points in just 30 minutes. China’s stock boom “is clearly unsustainable,” Greenspan told a Madrid, Spain, conference via satellite. “There is going to be a dramatic contraction at some point.”
The Shanghai Composite shot up 130% in 2006 and has risen more than 50% so far this year. Greenspan said a Chinese stock retreat could hurt asset prices worldwide. But the global economy may be able to shrug that off. Analysts have been concerned about the overheating Chinese market for a while now.“There’s been this pent-up demand in China itself to invest in companies and in the stock market in particular, because people have not been able to invest outside the internal markets,” said Brett Conrad, managing partner at Longboard Capital. Chinese investors have been opening brokerage accounts to the tune of about 250,000 a day. Trading accounts on China’s two stock exchanges grew 30% to 95 million in ‘06, according to the China Securities Depository and Clearing Corp.
Three factors have driven the Chinese stocks skyward, said Mark Zandi, chief economist at Moody’s Economy.com. First, China’s economy is “booming,” growing 11.1% in the first quarter vs. a year earlier. Second, money is “swashing over the entire Chinese economy,” Zandi said, due to the nation’s huge trade surplus. Finally, “there is an element now of speculation in the market. People have seen prices rise strongly for more than a year,” he said.China’s surging stocks draw comparisons to America’s tech bubble that burst in March 2000. “The bubble may at this point be small enough that if it gets pricked, that the fallout will be limited,” he claims. “But if it continues to grow . . . and a year from now it gets pricked, the fallout will be more serious. If the (U.S.) tech bubble had burst in 1999 or 1998, then the economic consequences would have been much less serious and we may not have suffered a recession.” If the Chinese market correction happens soon and is relatively modest, it won’t have a big impact on the Chinese economy. And as long as China is powering along, the global economic and financial market ramifications should be modest.
So what can the Chinese government do to prevent such a fallout? The logical thing to do is to allow for a more rapid appreciation of the yuan. China last week raised its interest rates and required banks to boost reserves, hoping to restrain economic growth. It also increased the daily yuan trading range vs. the dollar. “Instead of 3% to 4% a year it should be double that. And I think that would go a long way to solve lots of their problems,” says Zandi. China seems unwilling to do that, despite intense pressure from the U.S. for a higher yuan. So as the bubble inflates, investors worldwide will hold their breath.
