Goldman Sachs Allays Fears of China Bubble Economy

U.S. investment bank Goldman Sachs has allayed fears that China could emulate Japan's 1980s bubble economy in a new report.

China's stock market saw a whopping rise of 130 percent last year, land prices have surged in the past five years and the currency keeps going up.

These factors have raised widespread debate over whether China's economy is overheating and developing a bubble like Japan in the 1980s, especially in the stock market.

Baidu, China's biggest search engine, lists 678,000 web pages discussing whether the country's economy is overheating.

A survey by the central bank last year showed 42 percent of Chinese bankers believed the economy was overheating or tending to overheat.

Cheng Siwei, vice chairman of the Standing Committee of the National People's Congress, warned that the bubble was developing in the stock market last month.

However, the Goldman Sachs report said, "China now and Japan then share a few macro similarities, but a more open economy and markets, stricter forex controls and better developed corporate governance could prevent China from repeating Japan's boom-bust experience."

Following the 1985 Plaza Accord in which the United States and other countries urged Japan to revalue its currency, the Japanese yen almost tripled in value against the U.S. dollar in three years. Corporate investment surged and land prices doubled, while Tokyo's Nikkei stock market index saw a 180-percent rise.

By the end of 1990, the Tokyo stock market had fallen 38 percent, wiping out 2.07 trillion U.S. dollars as Japan tightened its monetary policies to suppress the rise in value of assets such as land.

"In China, the foreign currency exchange mechanism is relatively inflexible as the Chinese government is still in the process of gradually liberalizing the capital account by imposing a daily movement of 0.3 percentage for yuan against the US dollar," the report said.

"We think this cautious, yet prudent move by the Chinese government is long-term positive," it said.

China's central bank would make two interest rate hikes this year, 27 basis points each in both the benchmark lending and borrowing rates to soak up unwanted excess liquidity. The bank predicted and believed these measures would help China to avoid a boom-bust bubble.