China will have own bubble to confront, Pimco's Bill Gross says

“The Chinese, I suspect, will have a bubble of their own to confront,” Gross said in a Bloomberg Television interview Thursday from Pimco's headquarters in Newport Beach, California. “It's gearing up for export that doesn't find an end consumer, that's the real problem in China.”

The “systemic risk” of new asset bubbles in global economies and markets is rising with the Federal Reserve keeping interest rates at record lows, Gross wrote in his December investment outlook posted on Pimco's Web site Thursday. Under what Pimco has termed the “new normal,” investors should be prepared for lower-than-average historical returns with heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.

“With unemployment in the double digits and likely to stay close to that for the next six months despite job creation ahead, the Fed has nowhere to go,” Gross, co-founder and co- chief investment officer of Pimco, said on Bloomberg Television.

Fed Chairman Ben S. Bernanke said after a Nov. 16 speech in New York that it's “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor's 500 Index from its March low.

Treasury three-month bill rates turned negative Thursday for the first time since financial markets froze last year on concern that the rally in higher-yielding assets has outpaced the prospects for economic growth. The two-year note yield touched 0.68 percent, the least since Dec. 19.

The Fed cut its target rate for overnight lending between banks to a range of zero to 0.25 percent in December. Policy makers reiterated on Nov. 4 that they intended to keep the rate at the record low for an extended period.

The “heavy lifting” will likely be done first by other central banks such as those in Australia and Norway that have already begun to increase interest rates, Gross wrote.

“China may abandon its dollar peg within six months' time and with it, its own easy monetary policy that has fostered more significant mini-bubbles of lending and asset appreciation on the Chinese mainland,” he added.

China has kept its currency at about 6.83 per dollar since July 2008 to help sustain exports amid a global economic slump.

China's trade surplus in October almost doubled from the previous month, to US$24 billion. The nation, with the world's largest foreign-exchange reserves of US$2.3 trillion, is the biggest creditor to the U.S., holding US$798.9 billion of Treasuries as of September.

“With renewed upward appreciation of the yuan may come potentially volatile global asset price reactions to the downside — higher Treasury yields, and lower stock prices — which the Fed must surely be leery of before making any upward move, of its own,” Gross wrote.

Gross advised following the lead of billionaire investor Warren Buffett on buying utilities because their earnings growth will mimic U.S. economic growth and provide steady dividend income. Buffett's Berkshire Hathaway Inc. agreed this month to take over Burlington Northern Santa Fe Corp., the No. 1 U.S. railroad, for US$26 billion.

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