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Looking at stock, housing markets from a global perspective

Overheated and wildly fluctuating stock and real estate markets across the globe have become one of the largest risks threatening fast, stable growth of world economy.

After the recent sharp fall of US stocks amid concern over cooling housing market and subprime loan crisis, many economists and analysts pointed out that meticulous attention must be paid to US and global real estate bubbles. The world economy has grown at a speed over 4% for four consecutive years, the longest fast-developing stage since the WWII ended in 1945. The International Monetary Fund predicted a speed around 5% in this and next year, slightly lower than the 5.4% of last year. But continuation of the good trend depends in a large part on development and changes in global stock and real estate markets. For the past two years global stock markets have been overheated, bloated and unsteady. According to statistics from Foreign Studies first issue in April, market value of stocks in New York, Tokyo, London, Paris and Frankfurt alone has exceeded $40 trillion, but only with an estimated actual support of no more than $25 trillion.

The US economy only increased 2% in the H1, but stocks soared. On July 19, the Dow Jones industrials broke 14000 points, creating the 24th record since this year. US stock value has taken 140% of its GDP and 40% of global stock. From 2000 to 2006, housing prices soared 80% across the US, and in the past five years 50% of the nation’s newly increased GDP came from real estate, and 70% of residents’ consumption growth depended on the wealth effect of real estate growth. Housing has become one of the most sensitive industries affecting US economic trend. If both stock and housing markets slump, the economy might be plunged into recession. The US is not alone.

The stock market value of US, Europe and Japan put together take more than 80% of the world total. In the H1 of this year, Paris stock soared as a whole and German stock approached a seven-year high on July 16. Markets of the BRICs (Brazil, Russia, India and China) have become a new focus of investment.
Since 2006, Japan has put in ¥1.17 trillion ($10 billion) on Chinese stocks, 2.7 times that of the previous year; capital went to India stood at 450 billion yen ($3,85 billion), up nearly 40%; that to Russia was 2.6 times over the end of the year before last; and investment to Brazil was four times that of the previous yearend. After a short-term fall, China’s Shanghai and Shenzhen stock markets hit a new record on August 6, with their total value exceeding 20 trillion yuan ($2.6 trillion) from 3 trillion yuan on July 28, 2005, or 6.6 times over two years before.

Outside the US, overheated housing market also became a major threat to economy. Britain’s Financial Times holds that a cooling real estate sector might not only hit the US economy but affect the 2008 presidential election. Despite the bitter lessons from broken bubbles in Japan and the Asian financial crisis, housing prices continue to soar in many Asian countries. In the Q1 of this year, China had 712.5 billion yuan in place for real estate development, up 26.3% over the same period of the previous year. Of this, although foreign capital only took 1.8%, it is a doubled figure year on year. Jeremy Grantham, Chairman of the Board of GMO, a privately held global investment management firm headquartered in Boston, believes that we are at the first moment of global bubbles in history. Related international institutions need to coordinate with one another and push forward international cooperation; countries need to strengthen macro-regulation and guard against bubble bursting. In an era of economic globalization, economies depend on one another. China should watch closely fluctuations in global stock and housing markets and take precautions. Individual investors should also keep an eye on the ebb and flow worldwide. (people.com.cn)