I think the concerns in the media about Dubai World’s “default” is the PR hype of careless creditors, trying to create hysteria to pressure the ARabs.
So I very nearly missed this very thoughtful insight in FT.
“There is a country on the other side of Asia, whose currency is also pegged to the dollar. Although its economy is expanding rapidly, short-term interest rates are below 2 per cent and the money supply has grown by 30 per cent over the past year.
‘This country is experiencing a real estate boom. Reports tell of a newly constructed ghost city with dwellings for a million people. Speculators are reportedly snapping up luxury developments, which remain unoccupied long after completion. Despite a 20 per cent vacancy rate in the capital city, new skyscrapers are being planned.
‘This country’s economy is also state-directed. Its rulers are looking for 8 per cent annual GDP growth as they seek to diversify their economy away from exports. State-owned enterprises are borrowing and investing to meet this target. Construction and infrastructure are taking an ever greater share of GDP, even though many projects are likely to prove unremunerative. A mentality of “build and they will come” prevails.
‘In short, economic conditions in China have much in common with those that prevailed until recently in Dubai. The population of China is roughly a thousand times greater than the tiny emirate’s. For this reason alone, the lessons from Dubai should be heeded.
The writer, Edward Chancellor, is a member of GMO’s asset allocation team.
Grantham Mayo Van Otterloo is a Boston-based asset management firm well known among institutional investors.
Jeremy Grantham, the founder, built much of his investing reputation by correctly identifying speculative market “bubbles”. He avoided investing in Japanese equities and real estate in the late eighties, as well as technology stocks din the late nineties.
He began warning about the overvaluation of equity and credit markets in 2006, well before the start of the present crisis, “In five years, I expect that at least one major bank (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private equity firms in existence today will have simply ceased to exist.”
Well Bear Sterns, Lehman collapsed. And Merrill Lynch, Citi, RBS, HBOS needed help to avoid failing.
“Mr. Chancellor is the author of several books including Crunch Time for Credit (2005) and Devil Take the Hindmost: A History of Financial Speculation (1999), a New York Times Notable Book of the Year. Prior to joining GMO, he worked as deputy U.S. editor for Breakingviews.com in New York and for Lazard Brothers.”