Merryn's Blog

The China bubble even has Anthony Bolton fooled

China is showing all the symptoms of being in a huge bubble. Property prices can't keep rising forever. Yet even Anthony Bolton seems to have embraced the idea that China is different. But history shows that bubbles all tend to end the same way – badly.

Does China have a bubble problem? Of course it does. We've written here several times about how 10% growth a year is unsustainable; about the obvious property bubble; and about how the Chinese authorities appear to have lost control of monetary policy.

So I was interested to see GMO's Edward Chancellor writing on the subject in the FT yesterday. Seems he is pretty convinced as well. All great bubbles, he says, have easy money and growing leverage. They reflect George Soros' theory of 'reflexivity', whereby their markets are determined by "a two-way feedback" in which reality helps shape the participants' thinking process and the participants' thinking helps shape reality. They end up in a situation where "already-inflated asset prices can only be sustained by further price appreciation and ever-increasing leverage". And as we always find out in the wake of their collapses they are "accompanied by fraud".

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China currently shows all the symptoms of a great bubble. Construction accounts for around 25% of economic activity and "the anticipation of future Chinese economic growth drives new construction while new construction drives economic growth". That's reflexivity at work.

But can it last much longer? People assume that property prices will rise indefinitely because they have so far. But "the newly constructed apartments in many Chinese cities are unaffordable to anyone but the rich elite, speculators have acquired millions of apartments that are currently sitting empty, while a glut of new supply is set to hit the market this year". Bubbles continue "until the misperceptions of investors are so glaringly obvious they can no longer be ignored". That can't be long now.

I'd give you one more thing Anthony Bolton. Bolton has long been known as Britain's most successful value investor, a man who apparently never compromised his investment principles when he was based here. These days he runs a fund in China. And according to Money Marketing he doesn't invest the same way there. Sure he looks for cheap companies but he also buys "firms which are growing more strongly but have fuller valuations." He tells the mag that he "would have been less willing" to buy this kind of stuff when he was investing in Europe "but that he has to make allowances for differences in the Chinese market."

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Oh dear. At the beginning of his column Chancellor takes a swipe at investors who "entranced with China's apparently glorious prospects" ignore the dangers posed by its bubble. They think China is different. But it probably isn't: so far history has made it pretty clear that all speculative bubbles are pretty much the same.

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