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China in midst of ‘greatest bubble in history’, says Rickards

HONG KONG: China is in the midst of “the greatest bubble in history”, said James Rickards, former general counsel of hedge fund Long-Term Capital Management LP.

The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.

“As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,” Rickards said at the Asset Allocation Summit Asia 2010 organised by Terrapinn Pte in Hong Kong on March 16. China “is a bubble waiting to burst.”

Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of an overheating and potential crash in China’s economy following a rally in stocks and property prices. The government has raised lenders’ reserve requirements twice this year to cool an economy that grew at the fastest pace since 2007 in the fourth quarter.

The World Bank indicated on March 17 that China should raise interest rates to help contain the risk of a property bubble and allow a stronger yuan to help damp inflation expectations. The nation’s “massive monetary stimulus” risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects, Washington-based World Bank said in a quarterly report on China released in Beijing.

Leveraged speculation in the stock market, wasteful allocation of resources by state-owned enterprises, off-balance- sheet debt through regional governments and the country’s human rights record are concerns, said Rickards, who worked for LTCM between 1994 and 1999, helping negotiate a US$3.6 billion rescue after the hedge fund lost US$4 billion in a few weeks in 1998.

“Take Russia and China together, neither of them is really deserving any investment” except for short-term speculation, Rickards said. India and Brazil are two of the “real economies” among the developing countries, he said.

Rickards also disputed an argument that China could hold US policies hostage through its US Treasury securities holdings. The Asian nation remained the largest overseas owner of the debt after trimming its holdings by US$5.8 billion (RM19.2 billion) in January to US$889 billion, according to Treasury Department data released March 15.

China would suffer massive losses if the debt was dumped, reducing the funds available in the US securities market and forcing the prices lower, he said. The US president also has the authority, rarely used, to freeze such positions, he said.

Harvard’s Rogoff said Feb 23 that a debt-fuelled bubble in China may trigger a regional recession within a decade, while Chanos, founder of New York-based Kynikos Associates Ltd, predicted a slump after excessive property investments.

China’s economic growth rate quickened to 10.7% last quarter, driven by a record 9.59 trillion yuan (RM4.64 trillion) of new loans last year and 4 trillion yuan, two-year stimulus spending plans for railways, airports and homes.

Bank loans slowed to 700 billion yuan last month, after lending surged more in January than the previous three months combined, central bank data showed. Growth of the broadest measure of money supply, or M2, slowed for a third month to 25.5% in February from a 29.6% gain in November, the quickest pace in more than a decade, government data shows.

China’s property prices rose at the fastest pace in almost two years in February, adding urgency to the government’s efforts to rein in speculation and increase the amount of affordable housing. Residential and commercial real-estate prices in 70 cities climbed 10.7% from a year earlier, the statistics bureau said March 10.

The Shanghai Composite Index surged 80% in 2009. Its members are valued at an average 17.4 times current year earnings, compared with 14.9 times for the US benchmark S&P 500 Index.

China’s stocks aren’t in a bubble and will gain by the end of the year as the government takes measures to prevent the economy from overheating, Bob Doll, BlackRock Inc’s chief investment officer for global equities, said in an interview this month.

Antoine van Agtmael, who helps manage US$13 billion as chairman and chief investment officer of Emerging Markets Management LLC, said this week that while there are signs that the nation’s real estate prices may be excessive, the stock market isn’t in a bubble and China is unlikely to face “chaos” or experience a hard landing. – Bloomberg LP

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