China faces asset-bubble risk: central bank adviser

Low interest rates, weakening dollar, capital inflows add to dangers, he warns

China is among the emerging markets facing risks of property and commodity market bubbles, central bank adviser Fan Gang said, joining officials from the region in expressing concern about surging asset prices.

‘The real risk is really asset bubbles,’ Mr Fan, who heads the National Institute of Economic Research, said at a business conference in Hong Kong on Tuesday.

A ‘Chinese asset bubble would be something very dangerous, that would cause the overheating’ elsewhere as well, he said.

Low interest rates sustained by the US Federal Reserve, a weakening dollar and capital inflows to emerging markets have added to the dangers, Mr Fan said. He becomes the latest voice indicating that the seeds of the next financial crisis may be being laid in Asia in the wake of liquidity injections by the world’s central banks.

‘When there is too much money around looking for good opportunities and emerging markets are the only places where growth is happening, over liquidity will lead to asset bubbles in equities, real estate and commodities,’ Mr Fan said. ‘That’s something we really need to watch.’

Emerging economies ‘might overheat and experience financial turmoil’, Bank of Japan governor Masaaki Shirakawa said in Tokyo on Nov 16.

Liu Mingkang, China’s top-banking regulator, said the day before that low US interest rates and the dollar’s depreciation present ‘new, real and insurmountable risks to the recovery of the global economy’.

A ‘double-digit’ economic growth rate wouldn’t be good for China, Mr Fan, the academic member of the People’s Bank of China’s monetary policy committee, told property developers at the Hong Kong conference. Gross domestic product (GDP) may be able to climb 8 per cent to 9 per cent next year, he also said.

China’s government has encouraged a US$1.3 trillion credit boom this year, helping growth accelerate while at the same time aiding an 81 per cent climb in the Shanghai Composite Index of stocks.

China’s economy grew 8.9 per cent in the third quarter from a year earlier, the fastest pace in a year, as stimulus spending and record lending growth helped the nation lead the world out of recession.

The median projection of economists surveyed by Bloomberg News is for GDP to jump more than 10 per cent in the final three months of 2009.

Mr Fan said that while the Chinese property market isn’t ‘crazy’, there is excessive speculation. High savings are fuelling that speculation, Mr Fan said, urging consideration of taxes on luxury properties. Levies are important to balance demand, he said.

China’s southern city of Shenzhen is ‘a pioneer’ by introducing a property tax, Mr Fan said. The average sale price of Shenzhen homes exceeded 20,000 yuan (S$4,050) a square metre in September, a record high, Huang Yu, executive vice-rector at China Index Academy, said at the same conference yesterday. In Beijing, the price was about 14,700 yuan a square metre, she said.

The academy compiles real estate data, including the China Real Estate Index System. ‘In the next 10 years, there will be demand for 1.2 billion to 1.4 billion square metres of homes a year,’ she said.

The total area of homes sold this year may reach 900 million square metres, from 600 million square metres in 2008.

Home prices in 70 major Chinese cities climbed 3.9 per cent from a year earlier in October, the most in 14 months, the government reported on Nov 10.

Consumer-price inflation isn’t likely in coming months, with stable food prices providing a restraint, Mr Fan also said.

He said China must continue its stimulus measures in 2010 to sustain growth, even as he rejected the prospect of a double-dip slowdown in the expansion. The United States may see a renewed slump, he also said.

China should maintain a ‘moderately loose’ monetary policy next year as government stimulus wanes and private investment and external demand remain weak, the State Information Centre said on Nov 16.

Source : Business Times – 19 Nov 2009

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