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First with Financial Comment from Arabia

Year of the Tiger: watch China for the next financial crash

with 3 comments

The Hong Kong Monetary Authority warned in its latest quarterly report that the city may face ‘sharp corrections’ in asset prices if hot money from the dollar carry trade decides to make a quick exit.

The Hang Seng Index is up 50 per cent this year, while house prices have surged by almost 30 per cent. For Hong Kong has been a major beneficiary of the global dollar carry trade as well as the Chinese stimulus package equivalent to half of GDP in the first six months of 2009.

Dollar peg

With its currency pegged to the US dollar Hong Kong is a natural target for the flow of dollar funds to high growth markets. Hong Kong CEO Donald Tsang said in mid-November that he was ‘scared’ ‘money flowing into Asia could cause another crisis.

‘We have a U.S. dollar carry trade at the moment. Where is the money going – it’s where the problem’s going to be: Asia. You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.’

King of the Shorts, Jim Chanos has been shorting the Chinese market (click here). But market timing is always tough even for the real experts. That said short rather than long China ETFs look the thing to buy.

Retail investors have been flocking to China this year on the growth story, and were not put off by a 20 per cent correction in Shanghai in August after an ominous warning from astrologers who for once got their timing right.

Retail investors

Yet it is the oldest truism in the mutual fund business that you can only sell an investment when it is close to its peak. That is when the retail crowd will believe what they can see in front of them. Of course, they actually turn out to be the last group to buy, and once the buyers dry up then the decent can be very swift.

The problem is judging when the liquidity might stop. Alan Greenspan famously denounced irrational exuberance in US markets in 1996 but they continued to spiral upwards until early 2000. Some bankers I met in Hong Kong recently argued that liquidity from China would keep the market alive for at least another year.

That said the market rally this year has probably gone too far, too fast, too soon – and the warning signal in August has not been heeded. Now we have official warnings aimed at the public as well as professional investors.

My guess is that the Year of the Tiger will prove to be as bad for financial markets as it usually proves: think 1998 and the Asian Financial Crisis for its last appearance!

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Written by Peter Cooper

December 17, 2009 at 10:07 am

3 Responses

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  1. All I know is that in Taiwan home prices have not dropped. Here in Taipei prices have only been climbing higher and higher. This is also what I have seen in Hong-Kong. In Taipei there is a higher demand for homes than there is supply so it is quite difficult for these home prices to drop. Over the years here in Taiwan they have only climbed higher and higher every year. Outside of Taipei it is a different story.

    I see the same for the big cities in China as well where as a correction could take place in the more urban areas of China. In the big cities of China you see more people then you do space, homes or retail shops which demand exceeds supply. With high exports and local demand I think it will be quite some time before we see a correction. This is my personal point of view as I travel to China along with Hong-Kong once a month and live in Taipei now.

    Ed Note: Dubai house prices moved ever higher until September 2008 and have since plummeted by 47%, the worst performance in 2009 out of 45 global real estate markets, so high house prices might not be a good sign!

    Andy

    December 19, 2009 at 9:45 pm

  2. Peter,

    One of the recurring themes of your pieces (which are all wonderful) is that you somehow think markets will suddenly become “free” again and will trade down based on fundamentals. That era is over. Ask Larry Summers.

    Edna R. Rider

    December 18, 2009 at 5:05 pm

  3. Here in Amerika, whenever someone points out some little problem on CNBC like the $12,000,000,000,000 National debt, etc., to any stock market pundit, they always seem to respond, “Don’t worry. China is the new engine of world growth, and will take care of all the world’s problems.” If the Chinese market does tank big time, it might be ‘look out below’, in New York, indeed worldwide. In my opinion, that will be the perfect time to buy the oil supermajors and big miners that will sell minerals to China for the rest of this century. Chinese demand for natural resources will be the big profit story for a long time. Australia will make a fortune, if they can remain independent.
    Get them while they are cheap, especially the oils, since commodities can stay down for quite a while if a recovery stalls. You don’t need copper, gold, or iron as urgently as you need oil and gas. And those miners are stingy with dividends, when compared to supermajors like BP and Shell. After China gets back on track, and they will, the miners will shoot back up and you can sell at a big profit.

    Bill Simpson in Slidell

    December 18, 2009 at 12:29 am


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