Greenspan Is Wary of China's Casino-Like Market

By William Pesek

May 25 -- Alan Greenspan and Li Ka-Shing may understand more than most what comedian Rodney Dangerfield meant when he said "I don't get no respect".

Here you have Greenspan, the man often called the greatest central banker who ever lived, and Li, Asia's richest man, worrying aloud about asset bubbles in China. And yet, the benchmark CSI 300 Index closed only 0.5 percent lower yesterday.

That doesn't compare with the 9.2 percent plunge on Feb. 27. That one, oddly, became a buying opportunity for an index that has jumped 92 percent this year after more than doubling in 2006.

Rational decision makers would normally quake at warnings about the casino mentality in Shanghai. Greenspan, after all, is a very cautious fellow who doesn't utter a word before considering what damage it might do. So when the former Federal Reserve chairman said May 23 that stocks in China face a "dramatic contraction", he's probably far more concerned than he lets on.

Li, meanwhile, spoke volumes on May 17 when he said: ``As a Chinese, I'm worried about the stock market in China.''

Those words should matter because of Li's investment acumen; folks in Hong Kong don't call the billionaire ``Superman'' for nothing. Yet parsing Li's warnings gets at a more important point: His considerable business interests would be directly affected if China hits a wall.

China's stock market is a sideshow and so obviously disconnected from reality that few stop to think how much damage a full-blown stock crash could do to Asia's No. 2 economy. It's not about the destruction of wealth; it's about how a stock plunge would hurt confidence in China and abroad.

Heading Warnings

History will probably show that Greenspan, Li and those investors around the globe losing sleep over China's bubble were spot on. Tens of millions of Chinese -- perhaps even 100 million or more -- are likely to regret not heeding such warnings.

The real losers could be China's leadership. When China's central bank governor, Zhou Xiaochuan, says stock prices are excessive and Premier Wen Jiabao worries about ``problems'' for the economy, you know Chinese officials are more concerned than they admit publicly.

They should be worried. Investors and business people with huge interests in China are watching very closely to see how officials in Beijing handle things. Think of the froth in Shanghai as a microcosm of China's bigger challenges.

If China's watchdogs don't temper the Las Vegas-like dynamic coursing through Shanghai, they will lose global confidence. The result could be less of the international capital on which China is dependent for growth.

Eyes on China

Chinese citizens are watching, too. The get-rich-quick mentality pervading Shanghai is understandable. It's merely a side effect of the rose-colored glasses with which many observers view China. You know the mantra: China's potential is boundless, it's all good, the country's leaders are infallible, and anyone who disagrees just doesn't get it.

Those running China's economy are gifted, indeed. It is doubtful that seasoned policy makers such as Greenspan would relish trying to wrest control of an economy zooming along at 11 percent -- or even faster -- while simultaneously pricking asset bubbles. China also lacks the conventional tools of a developed bond market and a centralized fiscal policy to get the job done.

Success in cooling Shanghai's stock bubble would go a long way toward convincing international and local investors that the good times can continue.

`Out of Control'

China is moving into a uniquely challenging period. Thinking back to the U.S. stock bust a few years back, it's hard to recall the head of a major investment bank saying stocks were ``getting out of control.'' Merrill Lynch & Co.'s China chairman, Liu Erh- fei, did just that on May 18. It was an extraordinary statement from someone you would expect to love a bull market.

When this bubble bursts, anyone who says they didn't see it coming will have to expect a few guffaws. Hugh Young, Singapore- based managing director at Aberdeen Asset Management Asia Ltd., puts it well: China ``is another one of these classic hot and speculative markets that will end in tears.''

The question now is what's being done to address China's asset effervescence and how to keep it from spilling over into other markets.

Until recently, the idea that a share plunge in Shanghai would trigger some kind of market contagion seemed farfetched. Shanghai shares didn't mirror China's economic situation, never mind that of Asia. Asian policy makers were wise not to make too big a deal out of Shanghai's gyrations.

Global Impact

Things have changed, though, thanks to a realization of how much Asia has riding on China. Japan's $4.5 trillion economy is far bigger than China's $2.6 trillion of output, yet China's economy is often more important as an engine of growth. As China goes, so go many parts of Asia.

Over time, stock woes will chip away at some current and future sources of growth. A Shanghai crash could drive international investors and executives to move their money elsewhere. It also could encourage Chinese households to spend even less.

That can't be good news for Asia, and that's why warnings from Greenspan and Li should be getting more respect.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)