Bubbles everywhere in Asia. The FT’s beyondbrics blog writes,
At an auction in Hong Kong this week, a rare block of four stamps from the Cultural Revolution sold for HK$8,970,000 (US$1.1m) – an all-time record for a Chinese stamp or multiple. Including a 15 per cent buyer’s fee, the anonymous buyer paid over US$1.3m for the stamps.
We’re sure some economist can explain the stamp bubble as a fundamental shift based on a new set of paradigms in the new reality of our new global economy. A stamp specialist in the article does just that, “The key is [the growth of] the Chinese economy.” We say hogwash and blame it on too many pair-of-dimes printed by the People’s Bank or too much credit created by the people’s banks.
The Economist makes the astute observation and distinction between upward sloping demand curves for investment goods (momentum trading and investing, anyone?) versus downward sloping ones for consumer goods,
But here’s the thing. When prices for consumption goods soar consumption growth falls, which limits further increses, OR rising prices feed back into wage increases and generate broader inflation. That’s not an ideal situation for the Chinese economy, but it would have some positive effect on rebalancing, it’s an easily observable process, and it’s curable with an expectations-adjusting period of monetary tightening and slower growth (or recession). But when prices for investment goods soar, demand for investment goods may increase as new buyers speculate that price rises will continue. The result is a bubble, and the impact can be extremely pernicious. In the present, serious misallocations of capital can result. In the future, the inevitable crash may lead to a deeper, more painful downturn.
Jim Chanos must be salivating as these are the stories that usually mark a top. If you click on his interview, Chanos states that fixed asset investment in China is now 7o percent of GDP. We would love to see some good data on China’s domestic credit. Stay tuned!