Chinese Headline
Stock and Real Estate Markets Hit Bottom! Bottom Falls Out!
 

According to Fan Gang a member of the Chinese central bank’s monetary committee "Adjustments in the stock market, the housing market and energy prices have all already happened. I think the correction has almost finished by now and (prices) might trend up in the future," He also asks “How could (stock) prices drop any further?" When the Titanic was filling with water, I am sure that many of the passengers were sure that the ship could not sink any further.

Standard &Poor’s, the people whose ratings helped create the subprime mess, apparently agree with Mr. Fan. They have upgraded China’s sovereign debt. Logical for a country with $1.8 trillion in foreign reserves. They do make one interesting point. According to S&P, China could have an abrupt slowdown because of distress in the banking sector made worse by the reliance on administrative measures to manage the economy. In other words, China may have a bad debt problem that makes the US’s issues look tiny and China does not have the financial or regulatory institutions to deal with the problem.

Well how could such a bad debt problem occur? First, there are the old bad debts. According to a report by Earnst &Young in 2006, Chinese financial system had bad debts of close to a trillion dollars. The Chinese government quashed the report, but that does not mean that the debts have gone away. Second there are new debts. If your stock and real estate market collapse by 50% in less than 6 months, doesn’t that indicate that there might be some major financial losses? Isn’t it just possible that some of those losses were leveraged by debt?

The US economy has been kept afloat by increased exports from a declining dollar. What would be the effect on the Chinese economy from a rising currency? Yet despite the negative impact on the important export sector, the Mr. Fan said a gradually rising currency is in China's best interests. Of course a rising currency means a greater inflow of speculative capital, liquidity, and eventually more inflation and bad loans.

So of course the stock market can drop further, the real estate and export market can get worse, inflation can rise and the economy can continue its abrupt slowdown. But as Mr. Fan points out, Beijing does not have a better policy alternative.

I am William Gamble, JD, LLM, Ex MBA, KSC, a consultant specializing in emerging markets. I have been quoted or interviewed by ABC, CNN Asia, Bloomberg, Fox, CNBC, NPR and other television and radio stations around the world. I have published 24 letters in Financial Times and articles in Foreign Affairs, and Harvard International Review. I have been quoted USA TODAY, The Far Eastern Economic Review, The International Herald Tribune, The South China Morning Post, Sankei Shimbun. I have written two books Investing in China and Freedom: America’s Competitive Advantage in the Global Market. In the past year I have spoken to CFA societies in 10 countries and 9 US cities as well as other conferences all over the world.

 http://www.ft.com/cms/s/0/a4dd327e-1855-11db-99a6-0000779e2340.html

William Gamble
 Author: Freedom: America’s Competitive Advantage in the Global Market
 EMERGING MARKET STRATEGIES
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