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China faces Japan-like asset bubble, says Nomura

20 Oct 2009

Asset inflation in China looks increasingly similar to the sharp rises in Japan during the 1980s, thanks to loose monetary policy. This bubble will be exacerbated by its ambitions to internationalise the renminbi, says the Japanese brokerage.

China’s economy could witness colossal asset bubbles forming and then bursting in a manner similar toJapan in the 1980s unless steps are taken, according to Nomura.

Economic conditions in China are ripe to create asset bubbles thanks to rapid growth aided by aggressive monetary policy in the wake of the global financial crisis, the Japanese firm says. Asset inflation will also be fuelled by deregulation as the Chinese authorities seek to internationalise the renminbi.

“China’s situation now is in many respects similar to that of Japan in the 1980s,” said Tomo Kinoshita, a strategist at Nomura in Hong Kong. “The process of internationalising the renminbi will inevitably add pressure for an asset price bubble to form. China would do well to learn from Japan’s experience.”

When Japan’s asset bubble eventually burst in 1989 it triggered a decade-long recession. Kinoshita said that if China wished to avoid treading down the same road its authorities should not liberalise too rapidly and attempt to stem excessive price rises by keeping a close eye on financial institutions and the property sector.

The country should also resist outward pressure to allow the renminbi to strengthen or convert too quickly, Kinoshita argues. The government has so far kept China’s currency steady at roughly Rmb6.84 versus the US dollar in the past year, but it will face rising currency appreciation pressures as the value of the dollar continues to slide.

“Once the course of a gradual appreciation becomes apparent, foreign investors’ expectations would be for [the renminbi] to strengthen further, which should in turn result in increased capital flows into China and especially into its stock and property markets,” Kinoshita said.

“The upward pressure on asset prices created by financial liberalisation measures will be so great that China is unlikely to be able to rigidly contain asset price inflation, even with a proper set of policies in place.”

The benchmark Shanghai Composite Index has surged around 67% since the start of the year amid signs the country has recovered from the global financial crisis faster than the rest of the world.

China’s real estate market has also rebounded strongly, with house prices rising 2.8% year-on-year last month, the fastest pace in a year. Investment in property development grew 17.7% in the second quarter also, according to official figures from the National Bureau of Statistics.

20 Oct 2009