China to face its own subprime crisis
Updated
After a week investors would rather forget, most Asian stock markets rallied today, followed by gains in Europe.
The turn-around represents guarded optimism that international efforts will bring the global financial crisis under control . The Australian government guarantee of all financial deposits for three years saw the main index, the All Ordinaries rebound by five-point-six per cent. Chinese shares opened lower but rebounded to close more than three per cent higher. It might however be a shortlived reprieve. A keen China watcher believes rather than being a safety net for exporting economies like Australia, China is about to face its own sub-prime crisis.
Presenter: Karon Snowdon
Speaker: Jonathan Kaufman, Wall Street Journal's Senior Editor and Assistant Washington Bureau Chief
KAUFMAN: Yes, well I think this is a real crisis for China as well. It's a crisis on two fronts. China has its own internal economic problems with inflation and it's sort of out of control spending, which has been an issue for several years now and now it also has a trade problem, which is if there is a global recession, which it looks like we're tipping into, that affects exports and that will have a huge knock on affect within China. But they are now as emmeshed in the world economy as every other country. They are the biggest holder of United States debt and so I think much more than they perhaps realise, they are both a player in all this, but also a potential victim.
SNOWDON: Could we see China pulling hard on the purse strings and closing off some liquidity say to the US?
KAUFMAN: Well, I think that is something that the US is always worried about. Frankly, I don't think China has any interest now in making the problem worse.
SNOWDON: Do you think we're in for some surprises out of China's domestic financial system?
KAUFMAN: I think you might be. My sense of China's domestic system in a sense, the domestic system there are the kind of problems you see in the US and elsewhere, in terms of lending, but on a much bigger scale.
SNOWDON: A bigger scale than the US?
KAUFMAN: Far bigger. When I was in China, you would meet people routinely, people who worked in an office and elsewhere, Chinese, who would go in and get home loans based on just signing a piece of paper or their loan officer would say, well, say you make 200,000 Yuan a month, that will get you the house. Just put down that number. I think there is a huge bubble in China, a real estate bubble, bubbles of other kinds and I think that I would be surprised if they don't start to face similar situations as the US has faced in terms of a housing crisis like this. Because banks were lending in China purely on a whim, just kind of keeping people in homes that they really couldn't afford. So it's starting to be a problem.
SNOWDON: So we're yet to see China's own subprime crisis emerge fully?
KAUFMAN: Yeah, I suspect that you might see it and I think again it will be for very much the same reasons, out of control spending, loan officers going off on their own. The Communist Party paying for projects for political prestige. All those things I think are bubbling just beneath the surface in China.
SNOWDON: What's going to be the ramification of that if it crashes?
KAUFMAN: Well, I think it will be quite serious. I think that people have long said that China is built on a kind of a airy foundation. The Olympics are over now, so I think China was hoping that it could bring things to a gradual slowdown without embarrassing itself on the world stage. But I think they have a huge problem just beneath the surface, as we see in the US, as we've seen in Australia, as we've seen everywhere, when the housing market crashes, when these markets crash. It's not quiet, it's actually quite noisy and can create huge knock on affects. And I think China will be dealing with those in the near future.
SNOWDON: Well, let's talk about the presidential election for the moment. The latest polls have Barack Obama eleven points ahead of John McCain. Can those polls be a trusted barometer in your view?
KAUFMAN: I think they can be. I think that this financial crisis has put a huge dividing line in the campaign.
Senator Obama has come across with being much more cool, calm, collected, surrounding himself with people like Paul Volcker Bob Ruben, and Larry Summers, projecting this sense that even if he doesn't know precisely what to do, he's talking to wise men. He has a sense of steadiness that may be will get us out of this.
SNOWDON: Still no detail from Senator Obama though on what he might do if indeed he wins the election. How much time will he have if he's in the hot seat to come up with a workable solution quickly?
KAUFMAN: Oh, I think we may actually see a situation quite unusual in the US that after the election, the Obama team begins to in essence help start running the country almost immediately. There are already transition talks going on.
SNOWDON: Well, that must be unprecedented, is it?
KAUFMAN: It is, I would suspect that the day after the election, whoever is elected, but if it is Senator Obama. He will sort of immediately go to the White House and say, here's my team, here's my treasury secretary designate, here are the people running things. We've got to start working together, either over your shoulder or side by side right away. Because as the markets as we see are not going to wait two months to know which way the country is going.
- Listen:
- Windows Media
