The Chinese economy and financial markets may look good now, but they’re setting themselves up for a crash, just like the one Japan suffered in the 1990s.
So says Peter Tasker, a Tokyo-based analyst for Arcus Research.
“Interest rates have been far too low for far too long,” he wrote in the Financial Times.
He says interest rates should about match a country’s nominal GDP growth, which means Chinese rates should have been about 10 percent for the last decade.
“Alan Greenspan has been criticized for holding interest rates too low and setting off a housing and credit bubble in the U.S.,” Tasker writes.
“But if U.S. monetary policy was wrong for the U.S., it was even more wrong for the high-growth countries that ‘imported’ it. The result could only be a massive misallocation of capital.”
Tasker notes that Shanghai stock exchange’s price-to-book ratio stands at 3.3, the second highest level in the world after India.
“And residential real estate trades at multiples of income that make the U.S. housing boom look tame.”
He says currency moves may burst the bubble.
“If China continues to follow the Japanese template, the end of the dollar peg will be the trigger event, setting off a Godzilla-sized credit binge.”
Tasker isn’t the only one concerned about China.
“People are looking at the bubbles as a way to gain economic growth in the short term,” economist Andy Xie told Bloomberg.
“They are not sure of long-term damages that they may suffer.”
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