China in 'greatest bubble in history,' Rickards says

The Chinese central bank's balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.

“As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,” Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong Tuesday. China “is a bubble waiting to burst.” Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of an overheating and potential crash in China's economy following a rally in stocks and property prices. The government has raised lenders' reserve requirements twice this year to cool an economy that grew at the fastest pace since 2007 in the fourth quarter.

The World Bank indicated Wednesday that China should raise interest rates to help contain the risk of a property bubble and allow a stronger yuan to help damp inflation expectations. The nation's “massive monetary stimulus” risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects, Washington-based World Bank said in a quarterly report on China released in Beijing.

Leveraged speculation in the stock market, wasteful allocation of resources by state-owned enterprises, off-balance-sheet debt through regional governments and the country's human rights record are concerns, said Rickards, who worked for LTCM between 1994 and 1999, helping negotiate a US$3.6 billion rescue after the hedge fund lost US$4 billion in a few weeks in 1998.

“Take Russia and China together, neither of them is really deserving any investment” except for short-term speculation, Rickards said. India and Brazil are two of the “real economies” among the developing countries, he said. Rickards also disputed an argument that China could hold U.S. policies hostage through its U.S. Treasury securities holdings. The Asian nation remained the largest overseas owner of the debt after trimming its holdings by US$5.8 billion in January to US$889 billion, according to Treasury Department data released March 15.

China would suffer massive losses if the debt was dumped, reducing the funds available in the U.S. securities market and forcing the prices lower, he said. The U.S. president also has the authority, rarely used, to freeze such positions, he said.

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