China is risking Japan 1980s-style bubble, BNP says

“We're entering a phase where China could experience similar asset bubble that we saw in Japan in the 1980s,” said Erwin Sanft, head of China and Hong Kong equities research at BNP Paribas. “If China continues its loose fiscal and monetary policy, that could be those problems.”

China implemented a stimulus package, cut interest rates five times since September 2008 and encouraged US$1.3 trillion of lending to boost domestic spending as the global recession curbed demand for the country's exports. The credit expansion helped the Shanghai Composite Index rally 83 percent this year and home prices in 70 major cities climb at the fastest pace in 14 months in October.

The Nikkei 225 Stock Average surged sixfold, and commercial property prices in the Tokyo metropolitan area rose fourfold in the 1980s before the bubble burst in 1990, leading to what the Japanese call the “lost decade” of little or no growth. The Nikkei still trades at a quarter of its December 1989 peak.

China is among the emerging markets facing risks of property and commodity market bubbles, central bank adviser Fan Gang said Nov. 18, joining Liu Mingkang, the country's top banking regulator in expressing concern about surging asset prices.

China may need to use “action rather than rhetoric” to prevent lending and assets from turning into a bubble, Morgan Stanley Asia Chairman Stephen Roach said Nov. 20.

Sanft, speaking in a Bloomberg Television interview in Hong Kong Monday, said he expects Hong Kong's Hang Seng Index to hit 30,000 next year, based on “fantastic” earnings growth. It last traded higher than 30,000 two years ago and closed at 22,455.84 last week.

Sanft recommended shares of China High Speed Transmission Equipment Group Co., a Hong Kong-based maker of gears for wind turbines, which has risen 93 percent this year through Nov. 20.

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