Greenspan Says China Stocks May Undergo `Dramatic Contraction'
By Joao Lima and Simon Kennedy
May 23 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said he was concerned Chinese stocks might undergo a ``dramatic contraction'' after its main stock index jumped more than 90 percent this year.
The benchmark CSI 300 Index, which tracks yuan-denominated A shares listed on China's two exchanges, rose to a record 3938.95 today. The index more than doubled last year as investors bet corporate profits would be boosted by the world's fastest-growing major economy.
``It is clearly unsustainable,'' Greenspan told a conference in Madrid today by satellite. ``There is going to be a dramatic contraction at some point.''
Greenspan's comments came as Treasury Secretary Henry Paulson and his Chinese counterpart, Premier Wu Yi, completed two days of talks in Washington aimed at smoothing trade friction between the two nations. The talks ended with agreements on financial services and aviation that are unlikely to damp calls in Congress for sanctions against China.
Greenspan, 81, continues to move financial markets with his utterances since he retired from the Fed in January 2006 to return to his previous career as an economic forecaster. His Feb. 26 comment that a recession in the U.S. is possible this year contributed to a brief global selloff in stocks that started in China, according to some traders.
Chinese shares have since resumed their climb, prompting concern among some investors and regulators that a sudden collapse may ensue should the Chinese government succeed in its efforts to cool the economy.
Exchange Rate
China last week increased the amount it lets the yuan move against the dollar and raised interest rates to restrain economic growth and a swelling trade surplus. U.S. lawmakers said the steps weren't enough to forestall legislation to punish China for maintaining what many charge is an artificially cheap yuan to stoke exports.
As Fed chairman for 18 years, Greenspan was known for convoluted prose that was occasionally punctuated with memorable phrases. In a December 1996 speech, Greenspan wondered whether asset prices were being driven by ``irrational exuberance,'' a phrase that was later seen as foreshadowing the technology-stock bubble of the late 1990s.
Greenspan today said the global financial system remains resilient. ``I am not worried about the system overall, but I am worried about some parts,'' he said. ``I am concerned for example about China.''
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