Madrid: Former US Federal Reserve chairman Alan Greenspan said he was concerned that Chinese stocks might undergo a “dramatic contraction” after its main stock index jumped more than 90% this year.
The benchmark CSI 300 Index, which tracks yuan-denominated A shares listed on China’s two exchanges, rose to a record 3,938.95 on Wednesday. It closed 0.5% lower on Thursday, 24 May 2007.
The index more than doubled last year as investors bet corporate profits would be boosted by the world’s fastest-growing major economy.
“It is clearly unsustainable,” Greenspan told a conference in Madrid on Wednesday by satellite. “There is going to be a dramatic contraction at some point,” he said.
China last week increased the amount it lets the yuan move against the dollar and raised interest rates to restrain economic growth and a swelling trade surplus.
The changes came ahead of two days of meetings in Washington between US treasury secretary, Henry Paulson, and his Chinese counterpart, vice-premier Wu Yi, aimed at smoothing trade frictions.
Greenspan’s comments contributed to the first decline in US stocks in four days and Chinese stocks also declined in US trading on Wednesday.
Convoluted prose: Former Federal Reserve chairman Alan Greenspan maintains the potential to move global economies post-retirement.
“The strength of the Chinese market has kind of spilled over into the positive sentiment here in the US,” said Michael James, senior equity trader at Wedbush Morgan Securities in Los Angeles. “To have someone like chairman Greenspan calling for a dramatic contraction in the Chinese markets might have made a few people a little nervous,” he added.
Greenspan, 81, continues to move financial markets with his utterances since he retired from the Fed in January 2006 to return to his previous career as an economic forecaster.
His 26 February comment that a recession in the US is possible this year contributed to a brief global sell-off in stocks that started in China, according to some traders.
Chinese shares have since resumed their climb, prompting concerns among some investors and regulators that a sudden collapse may ensue should the Chinese government succeed in its efforts to cool the economy.
“The Chinese have lost control of monetary policy and now it has reached the stock markets,” said Nouriel Roubini, chairman of Roubini Global Economics in New York. “There’s a bubble, and eventually it’s going to collapse.”
Greenspan said the global financial system remains resilient. “I am not worried about the system overall, but I am worried about some parts,” he said. “I am concerned, for example, about China.”
The People’s Bank of China had, on 18 May, announced that it will let the yuan rise or fall 0.5% a day, up from 0.3%.
The central bank also raised interest rates for a fourth time in the past year and ordered banks to put aside more money as reserves.
China’s practice of limiting the yuan’s gains has sucked in overseas capital, contributing to $1.2 trillion (Rs49.2 trillion) in reserves and fuelling a property and stock-market boom. It has little room to raise interest rates to damp its economy, because higher borrowing costs would only attract more money, Roubini said.
US lawmakers say an undervalued yuan is responsible for a record US trade deficit with China that has cost American manufacturing jobs.
They say China’s steps to loosen curbs on its currency aren’t enough to forestall punitive legislation. Since China ended a strict peg to the dollar in July 2005, the yuan has risen 7.9%, less than the 12% gains in currencies, including South Korea’s won and Malaysia’s ringgit.
As Fed chairman for 18 years, Greenspan was known for convoluted prose that was occasionally punctuated with memorable phrases.
In a December 1996 speech, Greenspan wondered whether asset prices were being driven by “irrational exuberance”, a phrase that was later seen as foreshadowing the technology-stock bubble of the late 1990s.
His musing on that day sent stocks lower around the globe, though they soon recovered and extended their rally for more than three years. The Standard & Poor’s 500 Index stood at 744.38 on 5 December 1996, the day of the remarks, and climbed to a record close of 1,527.46 on 24 March 2000.
Since his retirement, Greenspan has been giving paid talks to audiences around the world and writing a book, The Age of Turbulence, to be released in September.
He will advise the world’s biggest bond fund, Allianz SE’s Pacific Investment Management Co. (Pimco), on strategy during quarterly economic forums, Pimco said last week. Greenspan will join Bill Gross, Pimco’s chief investment officer who also manages the $100 billion Total Return Fund for the Newport Beach, California-based company.