Boom, yes; bubble, no, says Roach

Price gains backed by strong demand for housing due to migration to cities

(NEW YORK) The property boom in China isn't a bubble because it's supported by 'solid' demand for residential housing, according to Stephen Roach, chairman of Morgan Stanley Asia Ltd.

While portions of the real estate market such as high-end apartments are overheating, demand for residential homes will remain robust as rural Chinese migrate to bigger cities, Dr Roach said in a radio interview from Hong Kong with Tom Keene on Bloomberg Surveillance.

'This is just a sliver of the property boom,' said Dr Roach, noting that each year since 2000, between 15 million and 20 million people migrate to Beijing, Shanghai, and second and third-tier cities in mainland China. That's two and a half New York Cities created annually, he said.

'This underpins a huge demand for residential property. This property has not overheated and the demand for this property is very, very solid.'

The nation's property prices rose 12.4 per cent in May from a year ago, the second-fastest pace on record. China's banking regulator said on Tuesday that it sees growing credit risks in the real estate industry and warned of increasing pressure from non-performing loans.

China has raised downpayment requirements and mortgage rates and restricted loans for multiple-home buyers as it seeks to dampen record property price gains.

The government's 'decisive' actions in April are working to cool the sections of the housing market that were overheating, according to Dr Roach. 'By all accounts, it looks like the measures are working for now.'

China, the world's fastest-growing major economy, expanded 11.9 per cent in the first quarter from a year ago. The Shanghai Composite Index, which tracks the bigger of China's stock exchanges, has dropped 22 per cent this year. Markets in China are closed from June 14 to June 16 for a holiday.

China has kept the yuan linked to the dollar as a crisis-fighting policy, swelling its Treasury holdings and fuelling complaints from US lawmakers that it has an unfair advantage in global commerce. American lawmakers said that they'll go ahead with legislation targeting the yuan as US and Chinese leaders prepare to meet at a Group of 20 summit this month in Canada.

Floating the yuan won't rebalance the trade deficit, Dr Roach said.

'It's just bad economics to pretend we can fix the lives of middle class American workers by getting the Chinese to revalue its currency vis-a-vis the dollar - it's a horrible misconception. If we don't boost our national savings rate, with trillion dollar deficits as far as the eye can see, the Chinese piece of our multilateral trade deficit just goes somewhere else. It goes to a higher-cost producer and that taxes the American people.'

Treasury Secretary Timothy F Geithner said last week that a more flexible yuan would allow China to pursue 'a more effective, independent monetary policy, which is particularly important now, with China's economy facing a risk of inflation in goods and in asset prices'

China shouldn't cave to the pressure and should revalue the yuan when its financial system is more developed, Dr Roach said.

'They've still got a long way to go in opening up their capital account, opening up their financial system and making certain that their financial institutions can be reasonably well protected from the ups and downs of financial markets and currency gyrations.

'It's a process. Over the next 10 years, you will see China take enormous steps toward making their currency fully convertible but it will take that long or possibly even longer to do that.' - Bloomberg

Source: Business Times, 17 Jun 2010