China’s asset bubble fear remains

Written by Tony C H Goh
Friday, 04 December 2009 11:00

KUALA LUMPUR: The unprecedented amount of liquidity pumped into the financial system to reflate the global economy is putting pressure on China and could feed its asset price bubble to bursting point, a China investor group official said.

“The increased liquidity in the financial markets, courtesy of the money flowing from the US Federal Reserve, will flood the world with US dollars, and emerging-market economies including China have seen an influx of capital.

“However, it is not known to what extent or how badly the asset prices (in China) have been inflated,” Shi Wenchao, secretary-general of the National Association of Financial Market Institutional Investors (NAFMII), said in an interview yesterday.

The net inflow of funds into China’s equity markets reached a high of US$827 million (RM2.79 billion) in October. This is expected to counter the impact of measures taken by the Chinese government to curb asset bubbles.

There were concerns that the speculative frenzy in Chinese assets could lead to a bubble and derail the global economic recovery, Shi said.

An unprecedented US$1.3 trillion in new loans this year, coupled with US$586 billion in stimulus packages, helped China’s economy to record 8.9% growth in the third quarter, the fastest expansion in a year.

This credit boom has pushed up the Shanghai Composite Index by 79% so far this year, while the H-share index of Hong Kong-listed China companies has surged 70%. Home prices in 70 major cities in China climbed at the fastest pace in 14 months in October.

Shi said China was considering opening up its massive financial markets to foreign companies as early as next year, enabling corporates, particularly from Asean nations, to raise funds by issuing bonds.

There has been increasing interest among foreign companies to tap into China’s massive foreign reserves, which are approaching US$2.4 trillion. Chinese authorities are also considering allowing companies to sell high-yielding corporate bonds to reduce reliance on banks as a source of funding.

On the value of the yuan, Shi said while its status as an international trade currency was increasingly important, there was no real alternative at the moment to the US dollar as a reserve currency.

“The future role of yuan hinges on two main factors, China’s economic development and market forces. There should not be much fluctuation in value for it to be an international currency,” he said.

Shi’s comment echoes the view of China’s Commerce Minister Chen Deming, who said yesterday that the world should pay more attention to the stability of the dollar rather than the value of the yuan, as the two currencies’ effects on the global economy are incomparable.

China is resisting international pressure to let the yuan resume its appreciation to offset global trade imbalances until its own exports fully recover. Its central bank, the People’s Bank of China, has kept the yuan rate at about 6.83 to the dollar since July 2008, after allowing the currency to strengthen by 21% in the three years since scrapping its dollar peg.

On the role of NAFMII in China’s bond market, Shi said the association had managed to develop maturing financial markets in a short period of time.

This could be seen in the rise in the number of companies, banks and financial institutions issuing bonds to raise capital, he said.

From April 15, 2008 through October 2009, Chinese companies issued 1.42 trillion yuan (RM702.83 billion) worth of commercial papers and medium-term notes, with 1.17 trillion yuan still outstanding.

Shi pointed out that of the total four trillion yuan in stimulus packages rolled out by the Chinese government earlier this year to help spur economic activities, only 1.8 trillion yuan came from the central government. The lion’s share came from the financial markets.

NAFMII was established by the central bank in 2007 to help develop China’s over-the-counter financial markets.


This article appeared in The Edge Financial Daily, December 4, 2009.