Andy Xie, a former Morgan Stanley chief Asian economist, asserts that China's property market is the biggest bubble in the history of finance, and only by raising the interest rate can the bubble be pierced, says an article in China Times. Here is an excerpt:
Xie underlines that priority should be given to increasing interest rates rather than to appreciation of the renminbi. Revaluation of the renminbi alone would further exacerbate the property bubble and inflationary pressure, potentially causing a major economic crisis in the next two years.
Actually, Xie believes that growing expectation of the yuan's appreciation in financial markets is the most important reason for China's vast property bubble. Massive hot-money inflows would spark excessive liquidity and speculation, fueling China's property bubble.
According to Xie, in a normal economy, currency appreciation cools inflation by decreasing import prices. However, China imports mainly raw materials, equipment, and components. A modest currency appreciation would do virtually nothing to curb inflation.
Xie said that China has to increase interest rates steadily if it wants to achieve a "soft landing" from the current property bubble -- if possible, by 2 percentage points in 2010, another 3 percentage points in 2011, and more rate hikes in 2012. Such a trajectory for interest rates would not burst the bubble. Instead it would prevent the real interest rate from further declines and curb inflation.