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Beware the China bulls

China sceptics think a dangerous asset bubble could be building.

A stronger than expected economic recovery has led to much optimism among China-watchers, with HSBC’s Qu Hongbin, for example, raising his 2009 GDP growth forecast to 8.5% from 8.1% on the strength of robust investment growth and steady consumer spending. Foreign and domestic investors seem to share that optimism. The authorities are allowing more firms to invest in financial markets: fund management consultancy Z-Ben Advisors reports that $1.5 billion-worth of quota for qualified domestic institutional investors (QDII) has been allocated after a 17-month moratorium, with the backlog of 20 quota applicants to be cleared by the end of 2010.

Yet there are experienced China commentators who remain deeply worried about a looming disaster (see "China’s looming NPL crisis", Euromoney, April 2009) that they see as inevitable given the market environment and policy decisions of the authorities. Tomo Kinoshita, an analyst at Nomura, argues that a dangerous asset bubble is developing, referring to the similarities between conditions in China now and in Japan in the 1980s. The likely deregulation of the bond market and interest rates in China, coupled with aggressive lending by banks, mean a probable inflation of asset prices and – somewhere down the line – the rapid increase in NPLs that is the inevitable result of excess liquidity.

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