China Stocks ‘In Deep Bubble,’ May Drop 25%, Xie Says

From Bloomberg:

China’s economy isn’t “sustainable” and the benchmark Shanghai Composite Index may fall another 25 percent, former Morgan Stanley Asian economist Andy Xie said in an interview.

“The market is in deep bubble territory,” Xie, who correctly predicted in April 2007 that China’s equities would tumble, told Bloomberg Television.

The Shanghai index plunged 6.7 percent to 2,667.75 today, the most since June 2008 and entering a bear market, on concern a slowdown in lending growth may derail a recovery in the world’s third-largest economy. Xie said the index “should be 2000 or less.”

The Shanghai gauge slumped 22 percent this month, the worst performer among 89 benchmark indexes tracked by Bloomberg, as banks reined in lending to avert asset bubbles and policy makers advised industries such as steel and cement to curb overcapacity. The decline stopped a rally that had sent the measure up 103 percent from a November low on prospects the government’s 4 trillion yuan ($586 billion) stimulus program and a record amount of new credit would ensure the economy grows at least 8 percent this year.

“The local market bears are convinced that tightening is already underway,” said Howard Wang, head of the Greater China team at JF Asset Management, which oversees $50 billion. Only “a very strong set of macro numbers in August” or “stronger statements from central authorities” would change this trend, Wang said.

Global Tumble

The tumble in China stocks send the MSCI World Index of 23 developed nations down 1 percent at 10:17 a.m. New York time. The Bank of New York Mellon China ADR Index, tracking American depositary receipts, lost 2.6 percent, led by commodity producers.

At least 150 stocks on the 898-member Shanghai index dropped by the daily 10 percent limit. Industrial Bank Co. and Aluminum Corp. of China Ltd. tumbled by the permitted cap after Caijing magazine reported new loan growth this month may be almost half that of July. Lower profits dragged Baoshan Iron & Steel Co., the nation’s biggest steelmaker, and China Southern Airlines Co. down at least 7 percent....MORE