BT : China likely to avoid US-style housing crash

Business Times - 16 Jun 2010

China likely to avoid US-style housing crash

Jeremy Grantham praises its moves to rein in asset bubbles

(SYDNEY) Jeremy Grantham, who correctly predicted US stocks would lose money in the past decade, said China's 'experimental' approach to reining in asset bubbles may help it avoid a US-style housing market crash.

China's lawmakers have raised down payment requirements and mortgage rates and restricted loans for multiple-home buyers as they seek to dampen record property price gains. US Federal Reserve chairman Ben Bernanke said in January the central bank's low interest rates didn't cause the past decade's housing bubble and that better regulation would have been more effective in limiting the boom.

'Bernanke for example has not admitted that asset class bubbles matter at all, but the Chinese know they do,' Mr Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co, said at a media briefing in Sydney yesterday. China is 'adventurous in trying new things, and they're really quite aware of potential dangers'.

China's banking regulator said yesterday it sees growing credit risks in the nation's real-estate industry and warned of increasing pressure from non-performing loans. The nation's property prices rose 12.4 per cent in May from a year earlier, the second-fastest pace on record.

An S&P/Case Shiller index of house prices in 20 US cities fell 33 per cent from its peak in July 2006 to April 2009.

While China does have a housing bubble, it's not as significant as the US's because fewer people own expensive houses and they had to pay larger deposits on them, Mr Grantham said. There isn't a stock market bubble in China, he added.

Mr Grantham, whose firm managed US$106.3 billion at March 31 according to its website, is best-known for his bearish calls on US stocks. In 2000, he accurately predicted that US stocks would lose money in the coming decade. The Standard & Poor's 500 index lost one per cent a year in the 10 years ended Dec 31, 2009. In March 2009, he recommended investors get back into stocks, just as equity prices reached a 12-year low.

The S&P 500 rose nearly 80 per cent between its low on March 9 2009 and April 23 this year. The index fell 0.2 per cent to close at 1,089.63 yesterday in New York.

Mr Grantham, who estimates the fair value of the S&P 500 is 875, said in a quarterly newsletter posted on GMO's website in April that the market's rally was 'excessive' and was fuelled more by the Fed's monetary policy than by the rebound in the economy, which is facing 'seven lean years'. Keeping benchmark lending rates near record lows for too long may be a 'disaster waiting to happen', he said.

Mr Bernanke 'may lead us for the third time in 12 years off yet another cliff by keeping rates so low for so long that speculators make hay', he said.

GMO is buying 'high quality blue chip' stocks, betting they'll outperform more speculative companies in the next seven years, Mr Grantham said. Its picks for its Quality Fund don't include financial stocks, he noted.

'Financial crises are a rhythm of our capitalist system and with Bernanke and Greenspan around, they have become even more embedded,' he said.

Some of China's measures to control bubbles won't work, while others will work too well and need to be pulled back, according to Mr Grantham, 71. 'China is more experimental and that's what life's all about as far as I'm concerned,' he said. -- Bloomberg

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