Thursday, October 08, 2009

No [Serious] Chinese Bubbles-Yet

In another interesting The Economist story, it is argued that the loose/inflationary monetary policy of the People's Bank of China hasn't yet created any bubbles there.

Assuming the Chinese housing price statistics are correct, there clearly isn’t any bubble there. Even if price increases are underestimated somewhat it doesn't appear to be any bubble. While the rate of price change has increased from last year, the increase isn't dramatic and reflected a recovery from last year's price decrease.

The stock market is a more complex story. The Chinese stock market has rallied dramatically from last year's lows, but the P/E ratio remains well below the historical average. On the other hand, that historical average is higher than in other countries. And it should also be noted that inflationary monetary policies will likely in the short term boost corporate profits (in both absolute terms and relative to for example labor compensation). And if the "E" in the P/E ratio is artificially high, then the "P" may be too high even if the P/E ratio isn't high.

Even so, the stock market doesn't appear to be significantly overvalued yet, as the increases so far mostly appears to reflect recovery from previously depressed levels. However, if monetary conditions stay as loose as they are, bubbles will likely arise.


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