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Jan. 15 (Bloomberg) -- A U.S. 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 U.S. is more important to the world,'' Malkiel, 75, said during an interview. ``The U.S. 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 U.S. 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 policy makers will shift the target rate for overnight loans between banks to either 3.75 percent or 3.50 percent this month.
11.5% Growth
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 U.S.
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 U.S. 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 46.6 times estimated earnings in Shanghai, 25.9 times in Hong Kong and 30 in New York, according to Bloomberg data.
`Restricting Arbitrage'
``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, has gained 6.7 percent this year 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.
http://www.bloomberg.com/apps/news?pid=20601109&sid=ayaa.uTo8bsE&refer=home
``The U.S. is more important to the world,'' Malkiel, 75, said during an interview. ``The U.S. 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 U.S. 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 policy makers will shift the target rate for overnight loans between banks to either 3.75 percent or 3.50 percent this month.
11.5% Growth
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 U.S.
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 U.S. 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 46.6 times estimated earnings in Shanghai, 25.9 times in Hong Kong and 30 in New York, according to Bloomberg data.
`Restricting Arbitrage'
``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, has gained 6.7 percent this year 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.
http://www.bloomberg.com/apps/news?pid=20601109&sid=ayaa.uTo8bsE&refer=home
