Tuesday, April 27, 2010

Research - China How much air is there in the Chinese bubble?

Is there a severe asset bubble in China? In this report we answer this question by taking a closer look at valuations on the stock and property market, the development in debt leverage and construction activity and compare the development in China with recent bubbles in other countries. Our conclusion is that there is little evidence of an asset bubble in China, even though there is a substantial risk that a bubble might emerge at a later stage if the current very accommodative economic policy is not adjusted in time. If China is developing a bubble evidence suggests that the country is still in the early phase with ample time to adjust its economic policy.If property prices drop substantially in China, the impact is likely to be less and shorter lived than in developed countries because household debt leverage is very low in China, and as a high-growth developing country with urbanization remaining one of the main growth engines it will be much easier for China to absorb losses and excess capacity in the housing market. A bubble burst in China is unlikely to be a repeat of Japan. We do find some evidence that China's "USD peg" has contributed to pushing up asset prices, but a resumption of gradual appreciation will not alleviate this problem. On the contrary, it might increase the risk of asset bubbles
Research - China

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