主题：【欢迎点评】大摩亚洲首席经济学家谢国忠：泡沫之争 - 石油 vs. 房地产 -- Chieftain

Asia Pacific: Bubble Fight - Oil vs. Property

Andy Xie (Hong Kong)

Cyclical strength in the global economy, especially in China and the US, depends on the relative price change between property and oil. Property is the currency for consumption in the US and investment in China. A rising oil price is a tax that decreases the potency of property as a currency for expenditure.

The Fed cut interest rates aggressively to cushion the downturn from the bursting of the IT bubble. The excess liquidity led to a global property bubble, which turned into consumption boom in Anglo-Saxon economies and an investment boom in China. The Fed kept the interest rate at 1% for longer due to the terrorist attacks of 9/11 and the Iraq War. The property bubble has now become so big that inflated demand is overwhelming oil supply.

The high oil price creates massive income redistribution to oil producers from the rest of the world. It takes income away from US consumers and Chinese investors, who have been pumping up global demand. Hence, the income redistribution due to the higher oil price is contractionary for the global economy, in my view.

The global economy has experienced Japan’s property bubble in 1980s, the investment bubble in Southeast Asia in the 1990s, the IT bubble between the Asian Financial Crisis and 2000, and a global property bubble since. The demand impact from the property bubble has created an oil bubble. The oil bubble, however, is different from previous bubbles. It creates inflation and forces central banks to raise interest rates. That could deflate the property bubble, which would in turn kill the oil bubble also. If the global property bubble deflates in an environment of rising interest rates, it will likely lead to a global recession. I put the odds for such a scenario at 30% for the second half of 2005.

Property Bubble Sustains US Consumption …

As the Fed cut interest rates to 1% to fight deflation, it sparked a property bubble around the world. The bubble led to strong consumption growth in the US, despite anemic income growth, and massive investment in China, despite low returns on capital. The net wealth of the US households increased from US$42.3 in 2000 to US$45.2 trillion in 1Q04, within which the real estate component increased from US$12.5 to US$16.6 trillion. The value of real estate increased by 31% between 2000 and 2003, compared with 13% between 1997 and 2000. Without the extra increase in real estate value, US household wealth would have remained stagnant. Further, the consumption demand derived from the extra real estate wealth has revived US corporate profits and, hence, the stock market. US personal consumption increased by US$1 trillion between 2000 and 2003. Large tax cuts played an important role in creating this growth. However, I believe the property appreciation of US$4.1 trillion during this period may have been more important.

… and Fuels Chinese Investment

Investment and exports drive China’s economy. The money from exports has gone into investment, which has generated imports. Massive capital inflows, as reflected in an increase of US$303 billion in forex reserves since the end of 2001, have added to the funds for investment. However, because investment levels are too high, return on capital in China is generally low. Capital inflows and export income do not automatically translate into investment. Either the government has to make the investment or profit expectations must improve. The government pushed investment in 1998 and triggered an infrastructure investment boom. Rising profit expectations due to rising property prices have driven the current investment boom.

China’s property bubble has increased profit expectations dramatically. I have noticed widespread price inflation even in second-tier cities. Government statistics show a 20% increase in residential property prices nationwide since the beginning of 2002. I would not be surprised if the actual increase was more than one-third. Were we to assume that nominal GDP grows at 11% per annum and property prices do not increase, the current volume of property under construction would imply that new property sales are set to reach 11.4% of GDP in 2007 from 8.4% in 2004. I estimate the redistribution of income from property buyers to businesses (from local governments to developers and materials suppliers) at about 2.5% of GDP in 2004 and 3.5% in 2007, if the property price holds up. S&P 500 companies make about this much profit as a share of US GDP.

The numbers, however, do not add up; the expectation that all the property under construction could be sold at current or higher prices is irrational. Affordability is about ten times households’ disposable income nationwide and 12-15 times in the big cities. It is virtually impossible to sell over 10% of GDP in new property at such a high price. China’s property market is a vast bubble, in my view.

As property bubble has pumped up demand, the oil price has been rising. The tight demand-supply balance makes the oil price vulnerable to speculation, which is why speculation in oil is so rampant. I believe the property bubble has caused the oil bubble. I expect China’s GDP to increase by US$200 billion in 2004, while its oil consumption is set to rise by about one million barrels per day. I estimate that, as strong demand lifts the oil price by US$15 per barrel to around US$40, the incremental direct cost of the one million barrels is US$14.6 billion, while the indirect cost through higher bills for existing imports is another US$13.6 billion. Hence, the oil bill for a US$200 billion increase in GDP is US$28.2 billion, or 14% of the GDP increase, compared with an oil cost of 6% of GDP for the economy as a whole. In other words, the marginal cost of oil consumption is more than twice as high as the average. This sort of wasteful GDP growth is clearly not sustainable.

Further, the higher oil price is sparking inflation, forcing central banks to increase interest rates. The property bubble thrives on low interest rates and plentiful of liquidity. As central banks raise interest rates, the property bubble should deflate. Hence, I don’t see how the oil and property bubbles can coexist for long. The market is exhibiting considerable enthusiasm over oil, predicting an ever-rising oil price. This is a bubble phenomenon, in my view.

Speculation in oil could make a big difference to the global economy. The tight supply-demand balance makes the oil price highly sensitive to additional demand. Speculative demand could drive the oil price sky high and make these peaks last longer. This would force central banks to raise interest rates more quickly, which may deflate the global property bubble. If this happens, I think a global recession may follow.