Page 2 of 2 Markets: Brace for a China-led
chill By Chan Akya
property and stock
markets across Asia. There are some notable
exceptions such as Thailand, where a combination
of policy missteps has left markets relatively
stable rather than rising, but in most other
places the boom is all too apparent. Even in
straitlaced Singapore, house prices have risen
broadly over the past two years, wiping out
pent-up equity losses from the previous 10 or so
years.
Chindia to the fore But
all these markets are mere sideshows compared with what's
going on in China and India.
It is well-nigh impossible to complete
secondary market transactions on high-end property
in both markets, as a flood of new offers pour in.
Most new property developments are sold within the
first week of announcement, with the period more
likely to be a day or so in the big cities of the
two countries. By most estimates, property prices
have doubled in the past two years in major
Chinese cities, and more than tripled across major
Indian cities.
Stocks are very similar,
with significant money flows chasing a limited
number of listed entities. The lack of selection
is the key factor in pushing up overall market
valuations to unsustainable levels, and as such is
an eerie reminder of the aforementioned technology
bubble.
More than India, it is China that
faces the threat from investors chasing too few
stocks. India's markets have a much longer history
and, more important, many investors still remember
the stock-market scandal of the early 1990s that
wiped out the nest eggs of a few thousand people.
China's problem is also one of magnitude: with
more than 100 million investors directly
participating in the markets, the impact of any
downturn will be broad, and politically suicidal.
As I wrote previously, problems encountered in the
government of Hong Kong after a two-thirds decline
in house prices since 1997 will help to guide
policy direction in mainland China.
India's central bank has practiced
vigilance on asset markets for a longer time,
ensuring that banks are not providing easy loans
for equity investing, and also tightening the
guidelines on property loans in recent months.
Rate rises have also played a part in keeping the
equity markets below frothy valuations, although
that is entirely relative to the excesses observed
elsewhere in Asia. In contrast to the market
behavior in India, Chinese investors have shrugged
off recent rate rises, and banks have circumvented
restrictions on lending through other means.
What will happen? China will
have to choose between the lesser of two evils,
namely the protection of employment in its
export-dominated industries or the safety net
being created by investments in property and
stocks by millions of its citizens. I believe it
will choose to protect people's wealth more than
lower-end manufacturing jobs; therefore a sharp
revaluation of the Chinese currency, the yuan, is
certain in the next few weeks.
In its
aftermath, the economic cognate will have to shift
from production to consumption; therefore we
should see the stock prices of exporters falling
even as those of companies servicing domestic
demand will increase. Banks will have to absorb
billions of yuan in defaults from the export
sector, particularly to the many inefficient
state-owned companies in northern China. That will
cause a sharp decline initially in their stock
prices, but I expect the outlook to improve
rapidly thereafter.
For the rest of Asia,
a yuan revaluation would set off increased
volatility as investors try to take profits and
other Asian countries adjust their currency
values. In turn, their holdings of US and European
government bonds as part of foreign-exchange
reserves would diminish, sending up bond yields
globally. That is how the adjustment in China
would likely set off broader stock-market declines
globally as investors come to terms with both
higher interest rates and lower Asian appetite for
Group of Seven assets. Sharp declines in stock
prices would necessarily follow in most major
Asian markets.
This correction would prove
cathartic to the performance of Asian economies in
the decades to come, but in the short term, pain
is unavoidable.
Notes 1.
India 1, China 0, Asia
Times Online, March 3. 2. Dai pai dongs
are uniquely Cantonese, generally specializing in
a limited range of food items. Besides the
delicious and cheap food, the eateries are also
known for their communal seating, and extremely
high noise levels. 3. Hobson's choice, ATol,
March 7.
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