Greenspan Says China Stocks May Post `Dramatic' Drop
(Update2)
By Joao Lima and Simon Kennedy
May 23 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said he was concerned Chinese stocks might undergo a ``dramatic contraction'' after its main stock index jumped more than 90 percent this year.
The benchmark CSI 300 Index, which tracks yuan-denominated A shares listed on China's two exchanges, rose to a record 3938.95 today. The index more than doubled last year as investors bet corporate profits would be boosted by the world's fastest-growing major economy.
``It is clearly unsustainable,'' Greenspan told a conference in Madrid today by satellite. ``There is going to be a dramatic contraction at some point.''
China last week increased the amount it lets the yuan move against the dollar and raised interest rates to restrain economic growth and a swelling trade surplus. The changes came ahead of two days of meetings in Washington between Treasury Secretary Henry Paulson and his Chinese counterpart, Vice Premier Wu Yi, aimed at smoothing trade frictions.
Greenspan's comments contributed to the first decline in U.S. stocks in four days. The Dow Jones Industrial Average dropped 14.30, or 0.1 percent, to 13,525.65 after earlier reaching a record. Chinese stocks also declined in U.S. trading.
``The strength of the Chinese market has kind of spilled over into the positive sentiment here in the U.S.,'' said Michael James, senior equity trader at Wedbush Morgan Securities in Los Angeles. ``To have someone like Chairman Greenspan calling for a dramatic contraction in the Chinese markets might have made a few people a little nervous.''
Moves Markets
Greenspan, 81, continues to move financial markets with his utterances since he retired from the Fed in January 2006 to return to his previous career as an economic forecaster. His Feb. 26 comment that a recession in the U.S. is possible this year contributed to a brief global selloff in stocks that started in China, according to some traders.
Chinese shares have since resumed their climb, prompting concern among some investors and regulators that a sudden collapse may ensue should the Chinese government succeed in its efforts to cool the economy.
``The Chinese have lost control of monetary policy and now it has reached the stock markets,'' said Nouriel Roubini, chairman of Roubini Global Economics LLC in New York. ``There's a bubble, and eventually it's going to collapse.''
Financial System
Greenspan today said the global financial system remains resilient. ``I am not worried about the system overall, but I am worried about some parts,'' he said. ``I am concerned for example about China.''
The People's Bank of China on May 18 announced it will let its currency rise or fall 0.5 percent a day, up from 0.3 percent. The central bank also raised interest rates for a fourth time in the past year and ordered banks to put aside more money as reserves.
China's practice of limiting the yuan's gains has sucked in overseas capital, contributing to $1.2 trillion in reserves and fueling a property and stock-market boom. China has little room to raise interest rates to damp its economy, because higher borrowing costs would only attract more money, Roubini said.
U.S. lawmakers say an undervalued yuan is responsible for a record U.S. trade deficit with China that has cost American manufacturing jobs. They say China's steps to loosen curbs on its currency aren't enough to forestall punitive legislation.
Exchange Rates
Since China ended a strict peg to the dollar in July 2005, the yuan has risen 7.9 percent, less than the 12 percent gains in currencies including South Korea's won and Malaysia's ringgit.
As Fed chairman for 18 years, Greenspan was known for convoluted prose that was occasionally punctuated with memorable phrases. In a December 1996 speech, Greenspan wondered whether asset prices were being driven by ``irrational exuberance,'' a phrase that was later seen as foreshadowing the technology-stock bubble of the late 1990s.
His musing on that day sent stocks lower around the globe, though they soon recovered and extended their rally for more than three years. The Standard & Poor's 500 Index stood at 744.38 on Dec. 5, 1996, the day of the remarks, and climbed to a record close of 1,527.46 on March 24, 2000.
Since his retirement, Greenspan has been giving paid talks to audiences around the world and writing a book, ``The Age of Turbulence,'' to be released in September.
He will advise the world's biggest bond fund, Allianz SE's Pacific Investment Management Co., on strategy during quarterly economic forums, Pimco said last week. Greenspan will join Bill Gross, Pimco's chief investment officer who also manages the $100 billion Total Return Fund for the Newport Beach, California-based company.
The Federal Reserve this month kept its benchmark interest rate at 5.25 percent, the level it has been at since June.
To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net Joao Lima in Madrid at jlima1@bloomberg.net .
Last Updated: May 23, 2007 22:54 EDT
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