Olivier Blanchard, chief economist at the International Monetary Fund (IMF), talks with Bloomberg this morning about the prospects for an asset bubble in China. Blanchard, speaking from Washington, also discusses the impact of sovereign debt on global economic growth.
No China Bubble Concern
While Blanchard declined to comment on the situation at Greece due to ongoing discussion between the IMF, the European Union (EU) and the Greece government, he did offer some insight as to the "China bubble" suggestion made by the likes of Mr. Jim Chanos (link below).
Here is Blanchard’s response when asked if the IMF sees an asset bubble about to burst in China,
"We do not think so. For the most part, the growth in China, which has been very high, and is expected to continue, has been a healthy one."
He indicated that there could be pockets of bubbles; however, since the Chinese government is watching closely and ready to intervene when necessary, the IMF is “not “terribly concerned about any major asset bubble in China”.
On Yuan Revaluation
Blanchard noted the strategy of China is to increase domestic demand levels and decrease savings rate, which he believes is too high. As Beijing implements this process in order to re-allocate resources to the domestic sector, the Chinese currency--yuan or renminbi-- will then be allowed to appreciate. He believes this is what we are going to see in the next few years.
‘Fiscal Consolidation' A Priority
Blanchard said fiscal consolidation must become a priority for heavily-indebted advanced economies but that is likely to further weigh on demand, and thus on economic growth. This has manifested more intensely at Greece, but eventually all countries will go through a similar process.
In its newly released its World Economic Outlook today, the IMF forecasts for global growth was nudged up to 4.2% this year. China will grow the fastest --by 10% this year-- and 9.9% in 2011.
However, over the past week, Beijing announced measures aimed at cracking down on property speculators amid an 11.7% rise in urban home prices last month from a year earlier, its fastest gain in five years.
China cynics such as Mr. Jim Chanos have argued that China's lending spree during the financial crisis has pumped too much liquidity into real estate, and compares China’s economy as “Dubai times 1,000”.
Among the counter-arguments, of which I subscribe, China's growing wealth feeds a long-term demand as the country goes through the urbanization process. Furthermore, regulators are implementing measures limiting the downside of any bubble. These views are basically supported by the IMF and Blanchard as seen in this interview.
The IMF has for years urged a rebalance where advanced countries, such as the United States, may need to weaken their currencies to boost exports, while emerging economies like China need to allow their currencies to rise, curbing exports.
There is a growing consensus among economists that such a shift will not have significant impact on the trade imbalance. That is the main reason why J.P. Morgan economists estimate that a 10% trade-weighted appreciation in the yuan would reduce China's overall exports by only 2%.
However, in a global race to increase countries’ export advantage to help recovery, most of the attention has focused on the need for China to appreciate the yuan to help drive Chinese domestic demand.
From all indications, the most likely scenario is that Beijing will allow the yuan to gradually appreciate, albeit very modestly. The adjustment is unlikely to meet expectations as critics in the U.S. argue that the yuan is as much as 40% undervalued against the dollar. This no doubt will escalate global tensions and a possible trade war between China and the U.S.
The global economic recovery has drawn support from a swift rebound in China. It would be advisable for U.S. policy makers to weigh the long-term effect against the short-term benefit, since currency exchange rates aren't the only factor to consider when it comes to China’s trade surplus.
In light of the coming “fiscal consolidation” among the advanced economies as warned by Blanchard, China’s growth prospect--among the best in the world--with its relatively low debt ratios, could certainly be one region with greater stability.
There will be some pockets of corrections in the medium term as Beijing tries to balance growth and inflation, while curbing potential bubbles--as expected in any growing economy. Nonetheless, these pullbacks should prove to be good entry points for long term investors.
Dian L. Chu is a market analyst, founder and editor of EconMatters.