China Is in Midst of `Greatest Bubble in History,' ex-LTCM's Rickards Says
China is in the midst of "the greatest bubble in history," said James Rickards, former general counsel of hedge fund Long-Term Capital Management LP.
The Chinese central bank's balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.
"As I see it, it is the greatest bubble in history with the most massive misallocation of wealth," Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China "is a bubble waiting to burst."
Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China's economy. The government has raised banks' reserve requirements twice this year after economic growth accelerated and property prices rallied.
China has pegged the yuan to the dollar since July 2008 to help exporters weather the global recession. The central bank buys dollars and sells its own currency to prevent the yuan strengthening, driving foreign-exchange reserves to a world- record $2.4 trillion as of December.
The Shanghai Composite Index of stocks jumped 80 percent last year and property prices rose at the fastest pace in almost two years in February, helped by a record 9.59 trillion yuan ($1.4 trillion) of new loans in 2009.
The World Bank indicated today that China should raise interest rates to help contain the risk of a property bubble and allow a stronger yuan to help damp inflation expectations. The nation's "massive monetary stimulus" risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects, Washington-based World Bank said in a quarterly report on China released in Beijing.
"People making comments about bubbles possibly don't have all the facts," HSBC Holdings Plc Chief Executive Officer Michael Geoghegan said in Shanghai today. Regulators are in control of the banking industry, and have the ability to curb lending as needed, he said.
Rickards said leveraged speculation in the stock market, wasteful allocation of resources by state-owned enterprises, off-balance-sheet debt through regional governments and the country's human rights record are concerns.
"Take Russia and China together, neither of them is really deserving any investment" except for short-term speculation, Rickards said. India and Brazil are two of the "real economies" among the developing countries, he said.
China is poised to overtake Japan as the world's second- largest economy this year, according to the International Monetary Fund, and Nomura Holdings Inc. forecasts it will contribute more than a third of global growth. The nation has surpassed the U.S. as the world's largest auto market and Germany as the No. 1 exporter.
Harvard's Rogoff said Feb. 23 that a debt-fueled bubble in China may trigger a regional recession within a decade, while Chanos, founder of New York-based Kynikos Associates Ltd., predicted a slump after excessive property investments.
Investors Bob Doll and Antoine van Agtmael say China's stock market isn't a bubble.
Equities will gain by the end of the year as the government takes measures to prevent the economy from overheating, Doll, BlackRock Inc.'s chief investment officer for global equities, said on March 5. China is unlikely to face "chaos" or experience a hard landing, Van Agtmael, who helps manage $13 billion as chairman and chief investment officer of Emerging Markets Management LLC, said in a Bloomberg Television interview yesterday.
The Shanghai Composite Index is valued at 32 times reported earnings, compared with 52 times at its peak in October 2007. The U.S. benchmark Standard & Poor's 500 Index trades at 19 times earnings.
China's economic growth quickened to 10.7 percent last quarter, helped by a 4 trillion yuan, two-year stimulus plan for railways, airports and homes. Property prices in 70 cities rose 10.7 percent from a year earlier in February.
Bank loans slowed to 700 billion yuan last month after surging more in January than the previous three months combined, central bank data showed. Growth of the broadest measure of money supply, or M2, slowed for a third month to 25.5 percent.
The banking industry has "very low impairment charges compared to what you'd expect this time in the cycle," HSBC's Geoghegan said. "I wouldn't be surprised if there's a gradual increase in impairments, but long term I'm confident that the structure of the banking industry is very, very sound."
Rickards disputed an argument that China could hold U.S. policies hostage through its Treasuries holdings. The nation remained the largest overseas owner of U.S. debt after trimming its holdings by $5.8 billion in January to $889 billion.
China would suffer massive losses if the debt was dumped, reducing the funds available in the U.S. securities market and forcing the prices lower, he said. The U.S. president also has the authority, rarely used, to freeze such positions, he said.
Rickards worked for LTCM between 1994 and 1999 and helped to negotiate its rescue by 14 Wall Street firms after the fund lost $4 billion in a few weeks in 1998. The Federal Reserve brokered the bailout on concern that LTCM's collapse would cause a meltdown in financial markets.
To contact the reporter on this story: Bei Hu in Hong Kong at email@example.com.