MONTREAL - Concern continues to mount over a property bubble in China in the
near term. Whereas earlier this year economic observers were suggesting that a
bubble might burst in one to three years, the overdrive of the Chinese economic
recovery has led BNP Paribas, for example, to warn of a 20% fall in real estate
prices in the second half of the year. Bloomberg News this week quotes the head
of Citigroup’s global head of real estate Thomas Flexner as calling the bubble
in the Chinese housing market "very real".
Following a series of fiscal tightening measures this year, the central
government two weeks ago announced still more severe measures targeted directly
at the housing market after stating that speculation remained uncontrolled.
This is in part because the interests of local government
executives are often at odds with officials in Beijing, following a decade
during which the central government has sought to promote national prosperity
by making local authorities compete among themselves for central patronage and
sponsorship of economic growth.
For some time provincial authorities, sometimes even more concerned with local
social stability than their faraway supervisors in the capital, have taken
independent growth initiatives often at odds with the desired policies of the
central political apparatus.
The overheating will not be cooled by the introduction this month of futures
trading based on the Shanghai and also the Shenzhen markets. As the Financial
Times noted, "On Tuesday last week, the third day of trading, the value of
stock index futures traded on the China Financial Futures Exchange exceeded the
value of stocks traded on the Shanghai Stock Exchange."
Foreign institutional investors (FIIs) are at present unable to trade index
futures, as they are awaiting publication of regulations that would permit
this. For the time being, these instruments are being used by wealthy retail
speculators rather than by investors seeking to hedge their positions. Ninety
percent of all trades are opened and closed the same day, the FT reported.
Volatility on the equity markets seems likely to increase, due to the
introduction of financial futures, which have quickly become a Wild West of
their own without any evident connection to the dynamic of the underlying
equities market.
In my weekly Market Rap columns, I have continually pointed to the 2,850 level
as an important support for the Shanghai Stock Exchange Composition (SSEC).
This week Bloomberg News quoted James Stellakis, formerly a strategist at
Touradji Capital Management, as indicating 2,873 to be a "floor" above which
the SSEC must hold in order to have a chance of running up to 3,100. However,
even 3,100 is still only the top of the broader 2,750-3,100 trading range
within with the narrower 2,850-3,000 range is embedded. (See, among other
examples, An
illusion of strength, Asia Times Online, February 27, 2010.)
Drafting this column during the Shanghai lunch hour, I wrote originally that if
the SSEC shows difficulty rising above 2,920, then that should be cause for
genuine worry. From about 1:20pm to 2:00pm local time, the SSEC made a charge
at precisely that level, failing at first to penetrate it, and then later just
peaking through for a moment, spending overall a good half-hour right at the
edge.
Failing to make good on that charge, the SSEC then proceeded to collapse for
the rest of the afternoon, closing at 2,868, although volume did continue to
spike during the last half hour of trading. In fact, there is one potential
technical support slightly further below the 2,850 level, at 2,838. Beyond
that, the next support would kick in only at 2,667.
Meanwhile, the International Monetary Fund fears that the whole Asian region
may overheat because its economic recovery is so much stronger than that in the
rest of the world. "Policymakers will have to weigh the strength of Asia’s
recovery against the fragility of the global recovery, which argues for a
cautious and gradual withdrawal of stimulus," the IMF said.
The organization expects Asia (excluding Japan, Australia, New Zealand) to grow
at an 8.5% rate this year and nearly as much next year. According to Business
Week, the World Bank predicts that global capital flows into "emerging Asia"
may reach US$800 billion this year, nearly twice the annualized figure for the
second half of last year.
The IMF also noted that while the crisis in Europe over Greece's sovereign debt
has not much affected Asia so far, "the main risk scenario is one of worsening
global risk aversion" that would lead European and North American banks and
other institutional investors to withdraw funds from the region.
Whether that would create more than a mere psychological crisis is open to
question, however, as Asian economies are generally less financially
intermediated. Before the global financial crisis, there was much talk over the
possibility of the "decoupling" of Asian from Western equity markets. The
crisis itself has shown that neither hemisphere exists in a financial vacuum.
Yet such a decoupling may come later into evidence on a selective basis.
Dr Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of Technology and The University of
Michigan, has researched and taught at universities in the United States,
Canada, France, Switzerland, and Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian Studies, Carleton University,
Canada, he also consults privately in a variety of fields.
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