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.
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First published in Asia Times Online, 30 April 2010.