Chinese asset markets have become a giant Ponzi scheme, says China financial blogger Andy Xie.
“I think that Chinese stocks and properties are 50 to 100 percent overvalued,” Xie, a former Morgan Stanley economist, writes.
“The prices are supported by appreciation expectation, (and) 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."
Xie says China’s asset bubble originated in excess liquidity that resulted from a weak dollar and strong exports. As the dollar entered a bear market in 2002, China’s yuan followed it down.
“The appreciation expectation drove liquidity to China,” he says. “One fourth of China’s foreign exchange reserves could be due to this factor.”
When the now-weaker dollar becomes strong again, liquidity sufficient to pop the bubble could leave China.
What’s occurring in China now is no different from what happened in other emerging markets.
Weak dollar always led to bubbles in emerging economies that were hot at the time. When the dollar turns around, the bubbles inevitably burst.
China’s stimulus-fueled stock market boom is alarming its government.
"It's a very serious threat,” Asia economist Mark Williams told The Associated Press.
“The Chinese government is walking a tightrope."
"There is the question of what happens if they rein in lending, because there is really no strong evidence that private sector demand is picking up."
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