Asset bubbles in China not out of control, says JP Morgan

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Chinese Prime Minister Wen Jiabao said that the massive stimulus in China will continue. He has also promised further measures to curb speculation in the housing market. China and asset bubbles both those words have dominated global conversations for the past many months.

In an interview with CNBC-TV18, Jing Ulrich, JP Morgan's Chairman and Managing Director of China equities and commodities, spoke on her outlook for the fear of asset bubbles building up.

Here is a verbatim transcript of an exclusive interview with Jing Ulrich on CNBC-TV18. Alos watch the accompanying video.

Q: A lot of commentators have said that a bubble of some kind could be formed in China. Do you think the talk is overblown?

A: There are some bubbles in China, but I don't think they are out of control. We are hearing a lot of concerns about the property sector and asset markets getting out of hand. However, I don't think things on that ground, are so bad. Some commentators are labeling China as the mother of all Black Swans, but I don't believe in that commentary at all. I think the economy is enjoying a very strong momentum and asset prices in some cases are quite high. However, we also had a very strong income growth. The debt levels at a consumer and country level is quite reasonable. So I don't think China is facing a collapse at all.

Q: What would cause you to worry then? Let's talk about real estate and the possibility of it bubble forming there. The stock market has been overheated at times over the last two years. What event or bubbling over would give you a cause for concern?

A: The asset markets in china have been higher. We have seen asset prices deflate during the financial crisis. If you look at the index of the Shanghai market, it's only half the level as it was in 2007. Property prices have been rallying throughout 2009. However, at this point, we are seeing property prices stabilise on the back of various measures introduced by the government. Throughout 2010, we are going to have a reasonable year. The economy is going to grow much more strongly compared to 2009 and asset prices will remain relatively stable. The key concern right now is policy and when the exit strategy will take place.

Q: One thing that came out of Davos for me, the conference at the WEF was this talk that we are going to have real friction between the US and China in 2010. Do you believe that to be true and what would be the implications of that?

A: We have some tension especially because of the trade attention. China is one of the largest exporters to the US. Given the economic recession here in the US market, some jobs might have been lost. I am not sure whether that's entirely due to the competition from China. We also have Washington being very unhappy with the value of the RMB. China doesn't want to revalue at this juncture because it has its own economic fundamentals and domestic concerns to look after. So you have the trade, you have the RMB, you have job losses in the US as well as political tension as well concerning the arm sales to Taiwan. Hence, a whole host of issues are affecting the US China relationship.

Q: What about China's US Treasury holdings? What would the implications of that friction be in your mind, could it partially be China unloading some of its securities the US securities that it holds, for example the China-US Treasury holdings declined the most in a month since 2000 last month so is this a political move? Do you think that China is looking to look at the deficit problem here in the US and some underperformance here and say its time to cut down the holdings of US debt?

A: I think China is much more interested in purchasing more real assets, namely gold, commodities and basically everything China needs to fuel this future growth. In terms of paper assets, China still holds large amounts of US treasuries as well as agency debt amounting to some USD 1.3 trillion. So it's very difficult for China to unload such a huge position amd I don't think China will. Incrementally, I think China will use these reserves to purchase more real assets as opposed to paper assets.

Q: How do I make money on the growth in China right now?

A: We have adapted a more conservative stance since the beginning of the year. We think banking and real estate may face more pressure due to the uncertainty of macro policy. However, consumer spending will remain quite strong. So we like the consumption stocks, pharmaceuticals, healthcare as well as internet sectors, which are set to benefit from rising incomes and rising affluent levels.