Saturday, 19 November 2011

China distracted by bubbles

Need for emerging markets to be focused on industries in order to be rich

1 comment:

Guanyu 道 said...

China distracted by bubbles

Need for emerging markets to be focused on industries in order to be rich

19 November 2011

China has been sidetracked by the emergence of asset bubbles that made quick bucks for the government, ex-Morgan Stanley Asia-Pacific economist Andy Xie said on Thursday.

‘In the last five years, China has been on the wrong track,’ said Mr. Xie, now an independent economist, at an address at TradeTech Asia. ‘Emerging markets need to be focused on industries, on the mundane stuff. That’s how you get rich.’

The property boom saw companies in China abandoning their traditional businesses to venture into property development.

‘Companies in China did not want to do business anymore. Manufacturing was just a front to borrow money from banks and divert the money into property development,’ he said.

There’s a cultural element behind the property boom as well: the belief that without a property, a Chinese family can’t marry off the son. ‘There are more boys than girls, so you know where the pricing power is. The girls don’t just demand a property, they check if you have a mortgage. And if you do, they say ‘we’ll think about it’,’ said Mr. Xie.

Because of the level of state control, the Chinese property boom served to benefit the government, which means curbs on the property market have similar effects to a ‘gigantic tax cut’.

But the silver lining is that the Chinese government will take care of the bubble because those in the Chinese Communist Party who are next in line are managing the problem, said Mr. Xie.

The successors to the current team of leaders have already been eased into the system as part of a gradual transition and are growing in influence, he noted. ‘They do not want the bubble to inflate because when they take over in two years’ time, it’s going to blow up in their faces,’ said Mr. Xie, adding that a big correction of some 50 per cent could be seen soon in the property market.

He also argued that China should not help the eurozone because it is not in China’s interest, reiterating a point he made earlier this month.

He has said that China’s assistance may create greater disdain for the country in Europe, partly as China has been seen as taking away jobs from Europeans. He also noted that Europe can take care of itself, saying that Greece’s total debt is 350 billion euros, against the eurozone’s GDP of over eight trillion euros.

Making comparisons with the Asian financial crisis, he argued that the Asian economies made bigger cuts to manage their fiscal deficits in that period.

He recommended investors raise their exposure to Chinese stocks, saying that the consumption growth story will continue.

‘In a small town in China, in the middle of the city, there’s always a Kentucky Fried Chicken,’ he quipped.