China May Avoid U.S.-Style Property Crash With Tightening, Grantham Says
Jeremy Grantham, who correctly predicted U.S. stocks would lose money in the past decade, said China’s “experimental” approach to reining in asset bubbles may help it avoid a U.S.-style housing market crash.
China’s lawmakers have raised down payment requirements and mortgage rates and restricted loans for multiple-home buyers as they seek to dampen record property price gains. U.S. Federal Reserve Chairman Ben S. Bernanke said in January the central bank’s low interest rates didn’t cause the past decade’s housing bubble and that better regulation would have been more effective in limiting the boom.
“Bernanke for example has not admitted that asset class bubbles matter at all, but the Chinese know they do,” Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co, said at a media briefing in Sydney today. China is “adventurous in trying new things, and they’re really quite aware of potential dangers.”
China’s banking regulator said today it sees growing credit risks in the nation’s real-estate industry and warned of increasing pressure from non-performing loans. The nation’s property prices rose 12.4 percent in May from a year earlier, the second-fastest pace on record.
An S&P/Case Shiller index of house prices in 20 U.S. cities fell 33 percent from its peak in July 2006 to April 2009.
While China does have a housing bubble, it’s not as significant as the U.S.’s because fewer people own expensive houses and they had to pay larger deposits on them, Grantham said. There isn’t a stock market bubble in China, he said.
Grantham, whose firm managed $106.3 billion at March 31 according to its website, is best-known for his bearish calls on U.S. stocks. In 2000, he accurately predicted that U.S. stocks would lose money in the coming decade. The Standard & Poor’s 500 index lost 1 percent a year in the 10 years ended Dec. 31, 2009. In March 2009, he recommended investors get back into stocks, just as equity prices reached a 12-year low.
The S&P 500 rose nearly 80 percent between its low on March 9 2009 and April 23 this year. The index fell 0.2 percent to close at 1089.63 yesterday in New York.
Grantham, who estimates the fair value of the S&P 500 is 875, said in a quarterly newsletter posted on GMO’s website in April that the market’s rally was “excessive” and was fueled more by the Fed’s monetary policy than by the rebound in the economy, which is facing “seven lean years.”
Keeping benchmark lending rates near record lows for too long may be a “disaster waiting to happen,” he said today.
Bernanke “may lead us for the third time in 12 years off yet another cliff by keeping rates so low for so long that speculators make hay,” he said.
GMO is buying “high quality blue chip” stocks, betting they’ll outperform more speculative companies in the next seven years, Grantham said. Its picks for its Quality Fund don’t include financial stocks, he added.
“Financial crises are a rhythm of our capitalist system and with Bernanke and Greenspan around, they have become even more embedded,” he said.
Some of China’s measures to control bubbles won’t work, while others will work too well and need to be pulled back, according to Grantham, 71. “China is more experimental and that’s what life’s all about as far as I’m concerned,” he said.
Risks associated with home mortgages are growing and a “chain effect” may reappear in real-estate development loans, the China Banking Regulatory Commission said in its annual report published on its website today.
The regulator has told banks to report on risk exposure by the end of June to help prevent a credit boom from leading to more bad loans. Property-price gains spurred concerns that a record 9.59 trillion yuan ($1.4 trillion) of loans extended last year to combat the effects of the global financial crisis may be causing asset bubbles.