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A 'speculation bubble' in China

(China Daily)
Updated: 2009-08-10 08:19

Q: The last time international hot money flooded China was with great anticipation of the appreciation of the renminbi. For this hot money influx, are investors trying to profit from rising asset prices?

A: Yes, absolutely. In the first half of this year, the expected appreciation of the renminbi provided a strong incentive for "hot money" flows into China.

People thought trade then might go well in China, but they were soon proven wrong.

There are many ways to achieve capital appreciation. If the exchange rate remains unchanged, we can still profit from gaps between different countries' interest rates and economic expansion.

Even if China's economy expands at a rate of 9 percent, there would still be capital influx, because the interest rate in the US is negative.

Hot money will only flow to strong economies when the economy of the rest of the world remains lackluster.

If the economies of Europe, the United States and Japan pose a strong rebound in the next year, the hot money will flow to them.

The flight of hot money will affect the Chinese market but we wouldn't worry too much, as our trade will recover by then.

Q: How would you evaluate the prospects of China's A share stock market in the second half of the year, especially that of the financial sector?

A: Unlike the mainstream opinions, we are not optimistic about China's banking sector.

The growing interest rate gap and rising profitability should support a stronger banking sector, but we should be aware of the possibility of rising bad debts, which might rise by several times.

China's banks could withstand the risks of rising bad debts, because the government will bail them out, but not the effect on their share prices.

Asset problems will arise during the interest rate hikes. Once bad debt appears, share prices of banks will begin to fluctuate. Such things have happened in the past.

On the other hand, we think the insurance sector will have a good performance. The insurance sector will benefit from asset bubbles, as well as interest rate hikes. And it is not exposed to the hazards of bad debts.

There is no doubt that property will be the driving force of China's economy, even in the coming year, but this sector is too close to the "policy exit."

The government might switch to a tighter monetary policy next year or probably later this year, when the economy is overheated in some regions. By then, the property sector will be the first to be regulated.

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