Andy Xie, an independent economist in Shanghai, writes in his new article 《又疯狂了》(“Crazy Again”) on his blog:
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.
- liquidity driven asset markets like China will not last;
- appreciation expectation supported asset markets will not last;
- most experts view China as the next economic engine, and as usual, most experts are wrong (this is nothing new) - what is the consequences if we over expect something? We are in for a suprise shock. There is no doubt that some industry in China will strive, but, when the bubble burst, it goes down together. And as long as China continue to pump liquidity into the system, we will have high volatility with a long term bubble in the making;
- too many are looking at the good side of China at the moment, because, comparatively, US and Europe are down, what are market can they go? What about the ugly side of China? Have anyone care to bring it up? Not many. What about property bubble, NPL in banks, overbuilding, exports collapse, outflow of money etc.
In short, as usual, I believe, people are always effected by the social moods that cause the trends, which are not shown by any indicators. Answer this question: In 1970, who would have expect China economy will be the top 3 in the world? The question tells us that not everything can be extrapolated by the history. So does it mean we can short China markets? Yes, why not, it is doing at PEs of high 20s, the low of Shanghai Index in Oct 2008 is about 1500 and peak at early August 2009 of 3500, a total of 133%. On 18 August it has corrected 17% to 2900. Say we use a reasonable PE of low 20, it will be 2300 (3500x20/30), so another 20% to go.
This is what Andy Xie said
Many would argue that China isn’t experiencing a bubble. The high asset prices just reflect China’s high growth potential. One can never make an ironclad case to pin down an asset boom as a bubble. An element of judgment based on experience is inevitable when one calls a market boom a bubble. I have had a reasonably good record at calling bubbles in the past. I wrote my doctoral thesis arguing that Japan was a bubble in late 1980s, a long report at the World Bank in earl 1990s arguing that Southeast Asia was a bubble, research notes at Morgan Stanley in 1999 calling dotcom boom a bubble, and numerous research notes from 2003 onwards arguing that the US property market was a bubble. On the other hand I have never called something a bubble that turned out not to be a bubble.
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