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China's Bubbles Will Burst, But Just Not Anytime Soon

By Hans Parisis   |   Thursday, 25 Mar 2010 05:05 PM

If you had any doubt about upcoming surprises within the industrialized economies’ sovereign-debt markets, People’s Bank of China Deputy Governor Zhu Min “reassured” us at the Credit Suisse Asian Investment Conference in Hong Kong by stating that the Greek debt crisis is only the “tip of the iceberg.”

That means there is still much more trouble ahead with several Western sovereigns.

Consequently, the dollar will continue to fulfill its unique role of “safe haven” when confidence in several industrialized economies’ sovereigns will repeatedly come under further stress in the future.

As a long-term investor, I wouldn’t bet against the dollar now.

Don’t worry, there will plenty of opportunities to bet against the dollar later on, but we aren’t there yet.

At that same conference in Hong Kong, Zhu — who as deputy governor of the PBOC is responsible for international affairs, policy research, and credit information — also said China will “continue to improve its managed floating exchange-rate regime based on market demand referenced to a basket of currencies.”

In my opinion, Zhu is extremely clear that Chinese authorities won’t take action on the yuan that could hurt their exports.

About the potential of growing bubbles, he said that “China’s central bank is trying to ensure there’s ample liquidity in the market to support the growth and also not too much liquidity to fuel potential asset bubbles.”

Zhu, who in February was also named as a special adviser to IMF Managing Director Dominique Strauss-Kahn, said “when we cope with inflationary expectations, we are very careful, we want to make sure to maintain stability, liquidity and growth … we are very careful on the interest rate, because it is a heavy-duty weapon.”

Regarding an exit strategy, he said interest rates are only one tool for the central bank, citing “fiscal policy rewinding and reserve-rate ratios as other options.”

So, there you have it.

The PBOC deputy governor doesn’t consider his country in a full blown bubble in the property and land markets yet, which is a stage where the fundamentals always completely decouple.

I don’t think we are on the verge of China's bubbles bursting now. And it could easily be a couple of years more before we are at that point.

Anyway, it’s good to keep in mind that China now has all the elements in full swing that cause havoc.

Whenever credit conditions like those seen in China since late 2008 have occurred in countries where the fundamentals were strong, where structural change and financial innovation was occurring at a mindboggling pace, and where the monetary, regulatory and fiscal authorities were in untested and untransparent waters — a "boom, bubble and bust" sequence has occurred.

This time isn't different.

China won't escape its own "boom, bubble and bust" sequence.

As usual, we can expect problems to start in the residential real-estate market, which then will likely spread to the commercial real-estate sector and finally, to the stock market.

But, no worry, we aren’t there yet.

Nevertheless, keep it on your radar screen.

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If you had any doubt about upcoming surprises within the industrialized economies sovereign-debt markets, People s Bank of China Deputy Governor Zhu Min reassured us at the Credit Suisse Asian Investment Conference in Hong Kong by stating that the Greek debt crisis is...
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