Greenspan fears "dramatic contraction" in Chinese stocks

Madrid: Former US Federal Reserve chairman Alan Greenspan has said that he feared a "dramatic contraction" in Chinese stocks leading to a fall in the Shanghai Composite Index, China''s main stock index, by as much as 1.5 per cent before closing down 22.58 points, or 0.5 per cent, at 4151.13.

His remarks had an impact on other global markets over China with Australia''s benchmark index falling more than 1 per cent and Japan''s Nikkei remaining flat. In Europe, markets fell in London, Frankfurt and Paris in morning trading.

Greenspan said in a meeting via teleconference that the recent boom in Chinese stocks could not last, saying, "It is clearly unsustainable. There''s going to be a dramatic contraction at some point," and qualified it by saying that the global economy may be able to shrug off a drop in prices.

The Shanghai index had almost tripled in 2006 and has risen 56 per cent so far this year.

Greenspan also said a correction could cause problems for Chinese investors'' personal wealth. Since the beginning of the year, millions of ordinary Chinese have invested in the stock market, often withdrawing from low interest savings accounts.

Though the Chinese government recently made it clear it would not intervene to prop up the market, some analysts have speculated that the government could be tempted to dip into its reserves to bail out to avoid social unrest.

The former Fed chief identified cheap Chinese imports as one of the elements stoking world growth and the knock-on effects on lower inflation and rates. "In the last five years, the world as a whole is a growing faster than at any time in the world''s history," he said. "It can''t last and it won''t last because it''s a one-shot adjustment."

"We will get major declines in certain levels but it need not feed back significantly to levels of employment or the real economy," he said.

Earlier this month, Greenspan reiterated that he believed there was a one-third chance the US economy, the world''s largest, would slip into recession this year. On Wednesday, he said the United States had no problem financing its current account deficit.