Former Morgan Stanley analyst Andy Xie made some rather strong comments about the Chinese market (via Barry Ritholtz)
My1510.cn: Chinese stock and property markets have bubbled up again. It was fuelled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100% overvalued. The odds are that both will adjust in the fourth quarter. However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future. The bursting will happen when the US dollar becomes strong again. The catalyst could be serious inflation that forces the Fed to raise interest rate.
Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn’t enough liquidity to feed the beast.
Liquidity isn’t a constraint yet. Even though loans grew by 24.4% in the first half or Rmb 7.4 trillion, loan-deposit ratio increased only to 66.6% in June 2009 from 65% in December 2008. It means that many loans have not been spent in real economic activities and have merely supplied leverage for asset market transactions. China’s property market is very similar to Hong Kong’s in 1997.
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