Top economist warns of asset bubbles

(Xinhua)
Updated: 2009-11-17 19:09

BEIJING - A Chinese economist has warned that the country's soaring property prices and equities were "signs of asset bubbles," owing to excessive liquidity.

The Economic Information Daily reported Tuesday that Wu Jinglian, an expert with the Development Research Center of China's State Council, or Cabinet, said excessive lending and liquidity would be a long-term problem for the economy rather than liquidity shortages and weak demand.

Wu, 79, was one of the first economists to promote the market-oriented economy in China.

"A credit boom along with a loose monetary policy and positive fiscal policy could prevent the economy from collapse in the short term, but these measures cannot solve the underlying problems," he said.

A total of 8.92 trillion yuan (1.3 trillion U.S.dollars) in new loans were pumped into the economy in the first 10 months based on a moderately loose monetary policy, far exceeding the government's target of 5 trillion yuan for the entire year.

Wu said excessive lending and re-leveraging would produce risks and bring the country's economy back to the days before the economic crisis. "The frothy property market can be taken as a sign of a new crisis and deserves great attention," he said.

Home prices in 70 medium and large cities rise 3.9 percent from a year earlier and 0.7 percent from September, according to data from the National Bureau of Statistics last week.

A report from the Chinese Academy of Social Sciences (CASS) also expressed the same concern, forecasting that property prices would stabilize in the first quarter of 2010 and rise on expectations of inflation in the second quarter.

"Speculation is the main reason behind the current price hikes, " said the CASS report.

Wu said too much investment in fixed assets was not a good idea despite the fact that China's economic recovery was still largely dependent on property market.

"The real drive behind China's recovery is the accelerating fixed-asset investment and record lending rather than the slow rise in domestic consumption, and this imbalance will be a drag on the country's economic restructuring," he said.

China's fixed-asset investment surged 33.1 percent year on year in the first 10 months to 15.07 trillion yuan as China rebounded strongly from the unprecedented crisis.

Government data showed the real estate sector accounted for more than 20 percent of urban fixed-asset investment, a key driver of China's economic recovery.

Wu called for more government efforts to address the excess liquidity and boost economic restructuring, so as to ensure long-term development "especially when we have achieved the rebound with short-term policies".

Pei Changhong, head of the Institute of Finance and Trade Economics at the CASS, also suggested that Chinese economy refocus in 2010 from expansion to structural adjustment while continuing the stimulus plan.

China's central bank said last week in its quarterly monetary report that the government would continue the relatively easy monetary policy while stepping up "efforts to balance inflation perception and economic growth."