22 June 2007

Alan Greenspan Starts the Clock Ticking For a China Bubble Collapse

The last time Alan Greenspan referred to "irrational exuberance" in an economy, three years later the economy crashed. We refer to that bubble as the dot.com bubble. Now Alan Greenspan is referring to a China Bubble, and it may take three years before people take the former Fed Chairman seriously.
China could be ripe for a crisis of its own that might resemble the collapse of Japan's "Bubble Economy" in the early 1990s -- and have enormous global impact, analysts warn.

Just as in Japan at that time, stock and property prices here are soaring. Banks have lent billions to build malls, office towers and apartment buildings -- although many remain unfilled.

Authorities warn the economy may be overheating and are taking steps to cool investment and lending, but to little avail. An attempt in late May to rein in surging stock prices sent shares tumbling for a couple days before they resumed their climb.

The likely trigger of a crisis, should it erupt, would be a pile-up of bad loans in a weak banking system, analysts say.

"The banking system is still based on collateral and the collateral is all overvalued," says Andy Xie, an independent economist based in Shanghai and Hong Kong.

"If the bubble bursts, then you will have a banking crisis like Japan in 1990," he says. "The question is how China can manage after the bubble."

Given China's growing role in global manufacturing, financial markets and commodities, the repercussions of such a collapse would be far-reaching.

China's banks are not behaving responsibly, and it is quite likely that the financial reports submitted by the banks are not honest and accurate.

Meanwhile, a large number of ordinary Chinese citizens are pouring their life savings into the booming Shanghai stock market, riding the ongoing expansion.

If history is any indication, they have three more years to ride.


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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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