There is a growing chorus of analysts and money managers who say that China is bubble that is bound to pop. Morgan Stanley analyst Andy Xie wrote in a research report released Monday that a Chinese asset bubble will most definitely burst in the next few years and sounded a rather alarmist note, calling the asset markets in the country a “giant Ponzi scheme.”
His report follows similar comments from GMO founder and famed value manager, Jeremy Grantham, who has been saying how worrisome he thinks China is all year. In January he told Steve Forbes he thinks they have “a terrible situation” and more recently in his July letter said Chinese markets “are very dangerously unbalanced and likely to come unhinged in the next few quarters.”
According to Xie’s report, which Barry Ritholtz links to here on his blog, The Big Picture, the Chinese are in for a severe bubble bursting. (The story was originally posted on Chinese website, www.my1510.cn .) From the report: “Chinese stock and property markets have bubbled up again. It was fueled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100 percent overvalued. The odds are that both will adjust in the fourth quarter. However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future. The bursting will happen when the US dollar becomes strong again. The catalyst could be serious inflation that forces the Fed to raise interest rate[s]…”
He continues, “Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation…This sort of bubble ends when there isn’t enough liquidity to feed the beast.”
Xie thinks a resurgence in the dollar could pop the Chinese bubble. He points to the dollar’s historical ups and downs to make his case. The dollar struggled through a bear market from 1985-1995, which was followed by a seven-year bull, giving way to the current bear market that he says began in 2002. If the past is any guide, says Xie, we could expect the dollar to pick up again 2012—bursting the Chinese bubble. “But there is no guarantee,” he writes.
Read Xie’s whole paper, here.
