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By Jeremy Glaser | 04-26-2010 02:40 PM

Don't Fret Over China's Rising Asset Prices

Matthews Asia's Jesper Madsen sees the rise in housing prices in China as an entirely different phenomenon than the U.S. housing bubble.

Jeremy Glaser: A lot of talk that the Chinese economy is really being powered by stimulus right now, that the incredible amount of money that the Chinese government flooded into the market, is what's keeping markets higher.

Is this something that you see as a worry, that when this gets pulled back that we could the Chinese market falter a little bit, or are they on already a self-sustaining recovery?

Jesper Madsen: It is correct that China's ongoing growth, and historically as well, has been fueled in great part by investments, there's no doubt about that, both for infrastructure and also for real estate.

But that's I would say a known factor when you look at China. What may be a little less known is, for instance, if you look at the last quarterly GDP numbers coming out last week out of China, you would have seen that exports actually had a negative impact on GDP growth.

You would also have seen that, almost in terms of the contributions to GDP growth, the domestic consumption was almost on par with investments.

Domestic consumption is increasingly one of the main engines as well. You have retail sales still growing in the high teens. People in China are still seeing their income levels rise along the lines of about 10 percent every year.

So you have households that are increasingly obviously garnering wealth, and with that you have changing consumption patterns. That's what we're trying to tap at Matthews.

But I think what's important to understand as well in that context though is that in the U.S., we've seen a lot of pain reside from the real estate sector. I think people project some of that onto the rising asset price in China and say, OK, the same thing must be happening there.

But what's different though, obviously there are a couple different factors. In the U.S. you had a very lax regulatory regime going into the financial crisis. People could buy with nothing down. Leverage was building very quickly in the system.

If you turn to China, you had to put down 30 percent for your first home, 50 percent for your second. Now they're clamping down very much so on the third homes.

Again, they want to attract capital for that first-home buyer, and now they're trying to say, OK, let's cut down on speculation. Let's talk at that second and third homeowner, and then try and make it harder for them to push prices up.

Also, we talked about the credit. At the household level, household credit to GDP is sitting around 25 percent. Now that compares to 100 percent for the U.S.

Again, you don't have the same dynamic. You're having households that see their wealth increase, again, on an annual basis, and that helps their ability to also repay any kind of debt, somewhat unlike what we have in the U.S.

Lastly, for the banking sector, you also have I would say stricter regulation in many respects. For instance, if you originate a loan in China as a bank, you own that loan. You can't sell it on as a CDO or some kind of structured product. That's a very different dynamic than, again, what you have in the U.S.

So while there will be bubbles, I would say, in certain areas, certain segments, China is a vast geography. It's a fast-growing economy that's scheduled to overtake Japan as the second-largest economy this year.

When you focus on such a large and diverse economy, obviously you can always point at bright spots and not-so-bright spots like some of the bubbles that, at least in asset prices, may be picking up. But it's not systemic in the same sense as what we saw here in the U.S.

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