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NEW YORK—A
US recession poses a bigger threat to the global economy
than a slowdown in China, according to Burton Malkiel,
the Princeton University economics professor who wrote
A Random Walk Down Wall Street.
“The US
is more important to the world,” Malkiel, 75, said
during an interview. “The US is slowing down
dramatically and we’re going to see little or no growth
in the first half of 2008. I’m not worried about a
slowdown in China because growth there will still be
larger than anywhere else in the world.’’
Stocks
in the
US
have fallen three straight weeks and posted their worst
start to a year since 1991, amid concern the economy
will contract. Goldman Sachs Group Inc. joined Morgan
Stanley and Merrill Lynch & Co. last week in estimating
that the nation may already be in a recession.
Malkiel
predicted the Federal Reserve will reduce interest rates
to as low as 3 percent this year, from 4.25 percent now.
“I anticipate lots of lowering in the first half,’’ he
said. Malkiel was a member of President Gerald R. Ford’s
Council of Economic Advisors when former Fed chairman
Alan Greenspan led the group.
Trading
in futures contracts gives 100 percent odds that
policymakers will shift the target rate for overnight
loans between banks to either 3.75 percent or 3.50
percent this month.
China
expanded at an 11.5 percent rate during the third
quarter, the fastest among the world’s 10 largest
economies. The nation will expand 10 percent this year,
Goldman predicted last week. Last year,
China
contributed 17 percent to global growth, the same as the
US.
Malkiel
said he is confident
China
will be able to slow growth to a “sustainable pace’’ of
7 percent to 8 percent.
He
recommends that investors buy stocks of US companies
that have business ties to
China. Malkiel also favors the SPDR S&P China ETF and
iShares FTSX/Xinhua China 25 Index Fund.
A Random
Walk Down Wall Street,
first published in 1973 and now in its ninth edition,
argued that asset prices fluctuate randomly and
investors can’t consistently beat the market.
Stocks
in China are in a “bubble’’ and will tumble once the
government allows funds to flow more freely, Malkiel
said.
China
Life Insurance Co. illustrates the point, he added. The
nation’s largest life insurer trades for 48 times
estimated earnings in Shanghai, 26.8 times in Hong Kong
and 31.7 in New York, according to Bloomberg data.
“It’s
just nuts,’’ he said. “China
has been artificially restricting arbitrage.’’ Malkiel
expects “these valuation discrepancies to disappear
eventually as
China
liberalizes its currency. When that will occur, I don’t
know.’’
The CSI
300 index, which tracks A shares listed on China’s two
exchanges, gained 7.4 percent this year through Monday
after jumping 162 percent in 2007 and 121 percent in
2006. The shares are trading at “bubble valuations,’’
Malkiel said, referring to the yuan-denominated equities
restricted mostly to local investors.
Malkiel
declined to predict when the Chinese stock market
“bubble’’ might burst, repeating his argument that it’s
impossible to predict future share prices.
“Over
time, China will allow its citizens to invest in Hong
Kong and overseas,’’ said Malkiel, whose newest book,
From Wall Street to the Great Wall, was published last
month. “Valuations of these Chinese stocks will then
have to normalize.’’
In
October, China’s securities regulator said it was
studying a plan to allow arbitrage in shares of
companies traded on domestic and Hong Kong exchanges.
The regulator is seeking to end price discrepancies.
Last
month, Hong Kong submitted a proposal to the Chinese
Cabinet for mainland individuals to buy shares directly
on the city’s stock market, paving the way for a pilot
program that has been plagued by repeated delays. With
reporting by Simon Kennedy in Paris, Li Yanping in
Beijing and Shamim Adam in Singapore. |
