Greenspan Says China's Stock-Market Bubble May Burst (Update2)

By Scott Lanman and Sree Vidya Bhaktavatsalam


Oct. 30 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said China's stock market is a speculative bubble that will burst.

Asked if China was in a state of ``irrational exuberance,'' a phrase Greenspan made famous in 1996, the former chairman said, ``I think so,'' speaking to a conference of insurance executives in Boston today. ``When you don't expect it, it breaks,'' Greenspan said of the bubble.

His comments reprise remarks from May, when Greenspan said he was concerned Chinese equities might undergo a ``dramatic contraction'' after its main stock index at the time had jumped more than 90 percent since the start of the year.

Greenspan's latest words of concern come at a time when investors are increasing bets on Chinese equities. Yesterday, PetroChina Co. and Alibaba.com Ltd. sold stock valued at more than $10 billion.

PetroChina, the world's second-largest company by market value, raised 66.8 billion yuan ($8.9 billion) in the biggest stock sale this year. Alibaba, the operator of China's largest trading Web site for companies, sold $1.5 billion of shares in the second-biggest initial public offering of an Internet company after Google Inc., said two people with knowledge of the matter.

China's benchmark CSI 300 Index has surged 170 percent this year as the country's households invest more of their $2.3 trillion of savings in equities. The rally has given China more of the world's 10 largest companies than the U.S. for the first time and prompted billionaire investor Warren Buffett to warn that prices have risen too fast.

`Carried Away'

China's stock market value is $3.7 trillion, compared with $18.7 trillion for the U.S.

``It's easy to be carried away in the stock market when things are going very well,'' Buffett said Oct. 24. ``We at Berkshire never buy stocks when we see prices soaring.''

Greenspan also said the view of many analysts that the U.S. current-account deficit will cause further declines in the dollar isn't valid.

``We are likely to see a long-term erosion of the dollar,'' in part because ``others are doing much better,'' he said.

Greenspan said Oct. 24 that the dollar's decline to a record against the euro also reflects on a widening interest- rate gap between the U.S. and the euro region.