BEIJING, May 27 -- China needs a property crash for stocks to return to a bull market because that would jolt investors into switching money to equities, former Morgan Stanley economist Andy Xie said.
"The property market is sucking in all the money," said Xie, who correctly predicted in April 2007 that China's equities would tumble, at a forum in Beijing today. "Without the property market crashing" a bull market in stocks is "unlikely," he said.
China's housing prices jumped by a record last month even after the government intensified a crackdown on speculation to limit the risk of asset bubbles and keep housing affordable. The nation's stocks have been among the world's worst performers this year, with the Shanghai Composite Index entering a bear market on May 11 after falling 20 percent from a Nov. 23 high.
The government has restricted banks from extending loans for purchases of multiple homes, increased mortgage rates and raised down payment requirements. The central bank ordered lenders this month to set aside more deposits as reserves for a third time this year.
Xie, who is now an independent economist, said China's inflation may accelerate to 10 percent or more unless interest rates increase. The prospect of higher borrowing costs has eased amid concern the European debt crisis will stifle China's exports and slow the world's third-biggest economy.
The market is "pricing in a hard landing in property" and a "policy misstep" by China's government, Jerry Lou, Morgan Stanley's China strategist, said in a Bloomberg Television interview today. "The whole market is a buy" as concerns are over-stated, he said.
The SE Shang Property Index dropped as much as 2.4 percent after the nation's taxation agency said it will tighten collection of a land tax. The Shanghai Composite Index was little changed at 2,625.25 at the 11:30 a.m. local-time break.
Citigroup Inc. of New York and Paris-based BNP Paribas have separately forecast a 20 percent drop in home prices in 2010. Citic Securities Co., China's biggest brokerage, predicted that as much as $59 billion, about a third of housing transaction volumes in the 35 biggest cities in 2009, may be diverted from property to equities this year.
Jing Ulrich, JPMorgan Chase & Co.'s chairwoman for China equities, said the Shanghai Composite may rise to 3,800 in the next 12 months, spurred by "reasonable" valuations and "strong" earnings growth.
Economic growth was 11.9 percent in the first quarter from a year earlier and the Organization for Economic Cooperation and Development said yesterday that the nation needs a "much stronger tightening of monetary policy." The OECD sees gross domestic product rising more than 11 percent for the full year.