The View | Juggling asset bubbles in China and Australia
Both countries are accepting targeted financial bubbles as a necessary risk. In China, the target is the stock market
China and Australia have a lot in common. Both countries have escaped widely predicted financial crises. Both economies are sagging under the weight of deflated investment booms. And as they try to stoke demand, both are accepting targeted financial bubbles as a necessary risk.
In China, the target is the stock market. Some are warning that China’s bull market is just an elaborate form of procrastination orchestrated by policymakers to bury past financial excesses.
Yet as each day passes, the yelps of protest are dying down. No wonder; the stock market has been unshortable for nearly a year. Even some of the most vocal China bears are now rebranding themselves as high-profile bulls.
Doubters find a parallel in the US, accused of stoking a housing bubble to cover up the effects of a burst internet bubble – only to face a greater crisis down the road.
On the bright side, financial assets as a percentage of both gross domestic product and household wealth are relatively small. This makes a stock market bubble a lesser evil. Chinese policymakers went to pains to curb excesses in the proper market, but seem to be allowing the equity bull market to rage.
Australia, on the surface, appears to be playing a much more dangerous game. Record low policy rates have helped push the property market to historically high valuations in some market segments.
The overall stakes are very high. At an aggregate level, household debt to GDP is above 125 per cent, among the highest in the world. Australia banks are vulnerable: lending to homebuyers is their biggest business segment.
