Yes, says Citigroup’s Willem Buiter, who thinks the Chinese authorities will fail in their efforts to prevent a classic boom, bubble and bust asset sequence.
Higher interest rates, renminbi appreciation and additional macro-prudential controls have all been mooted as way to prevent booms and bubbles developing in the Chinese land, property and stocks markets. However, Buiter says these measures are unlikely to implemented in time.
The countdown has begun.
From the conclusion of Buiter’s latest Chief Economist Essay (emphasis ours):
Although we still seem to be in the early stages of an asset boom, bubble and bust sequence in the property and land markets, and perhaps just in the recovery stage for the stock market, it is nevertheless likely in our view that China will experience such a sequence, starting in the residential real estate market. From there it is likely to spread to the commercial real estate sector and to the stock market also. Predicting the timing of the bubble phase (when asset price movements decouple completely from fundamentals) and of the bursting of the bubble (when the fundamentals exact their revenge) is not a science – probably not even an art, but more something akin to witchcraft. Our best guess is that a significant bubble may still be one or two years away, and the bust probably at least three years.
So, the clock is ticking, and this is why Buiter is so confident it will end in disaster:
The reason we are quite confident that a boom, bubble and bust sequence will take place in China is simple: whenever credit conditions like those seen since late 2008 in China have presented themselves in countries where the fundamentals are strong (as they are in China today), where structural change, including financial innovation, is occurring at a frenetic pace (as it is in China today), and where the monetary, regulatory and fiscal authorities are untried and untested (as they are in China today), a boom, bubble and bust sequence has occurred. This time is unlikely to be different unless the authorities in China act differently from the authorities in China and elsewhere in the past.
He says that even experienced monetary policymakers and financial regulators have failed to spot and prevent asset bubbles, and the Chinese are unlikely to be any different (emphasis ours):
A bubble is a manifestation of out-of-control or over-the-top economic success; you find bubbles in countries with strong fundamentals. In no major country are the fundamentals stronger, the structural change more dazzling or the policy authorities less experienced at managing a market economy than in China. We recognize that experience and familiarity with the modus operandi of a financial market economy are no guarantor of good policy. Even highly experienced monetary policymakers and financial regulators, heading institutions with a track record of decades, like the current and previous Federal Reserve Chairmen, failed to identify and prevent excessive credit growth and asset bubbles, and may indeed have contributed through their regulatory and monetary policy actions (or inaction) to the financial boom, bubble and bust that severely damaged the financial system of the US. Even so, the fact that those in charge of monetary, financial and credit management in China are operating in terra incognita increases the risk of policy errors.
However the bust, while painful for China and its main trading partners, need not neccesarily spell the end for China’s growth miracle, says Buiter:
In the short run, the impact of these asset market busts would be painful for China, and would have spill-over effects on its main trading partners and those dependent on China as a source of capital or other funds. But such a boom, bubble and bust episode, and others that would likely follow it, should not spell the end of China’s period of extraordinary growth, which could last another 20 or 30 years, provided China decides to change its growth model in a more domestic demand-driven and less capital-intensive direction. Growth in capitalist market economies, even state-capitalist market economies, has never been smooth and steady. It has always been cyclical and volatile, with periods of exhilaration and exuberance followed by periods of depression and despondence. China will be no different. What will be different, in our view, is the remarkable average growth rate around which these ups and downs occur.
Buckle up, everyone.
Full essay in the usual place.
Related link:
Buiter’s back – FT Alphaville