â¢Gross Says China Bubble to Threaten Growth as Global Export Demand Falters http://www.bloomberg.com/apps/news?pid=20601087&sid=aGT0drX7Vj9I&pos=5 China Will Face Its Own Bubble, Pimcoâs Gross Says (Update1) Share Business ExchangeTwitterFacebook| Email | Print | A A A By Susanne Walker and Carol Massar Nov. 20 (Bloomberg) -- Bill Gross, who runs the worldâs biggest bond fund at Pacific Investment Management Co., said Chinese growth is likely to be hurt by an absence of consumer demand from trading partners such as the U.S. âThe Chinese, I suspect, will have a bubble of their own to confront,â Gross said in a Bloomberg Television interview yesterday from Pimcoâs headquarters in Newport Beach, California. âItâs gearing up for export that doesnât find an end consumer, thatâs the real problem in China.â The âsystemic riskâ of new asset bubbles in global economies and markets is rising with the Federal Reserve keeping interest rates at record lows, Gross wrote in his December investment outlook posted on Pimcoâs Web site yesterday. Under what Pimco has termed the ânew normal,â investors should be prepared for lower-than-average historical returns with heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy. âWith unemployment in the double digits and likely to stay close to that for the next six months despite job creation ahead, the Fed has nowhere to go,â Gross, co-founder and co-chief investment officer of Pimco, said on Bloomberg Television. Fed Chairman Ben S. Bernanke said after a Nov. 16 speech in New York that itâs ânot obviousâ that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poorâs 500 Index from its March low. Negative Rates Treasury three-month bill rates turned negative yesterday for the first time since financial markets froze last year on concern that the rally in higher-yielding assets has outpaced the prospects for economic growth. The two-year note yield touched 0.68 percent, the least since Dec. 19. The Fed cut its target rate for overnight lending between banks to a range of zero to 0.25 percent in December. Policy makers reiterated on Nov. 4 that they intended to keep the rate at the record low for an extended period. Fed Bank of St. Louis President James Bullard said on Nov. 18 that experience indicates policy makers may not start to increase interest rates until early 2012. The âheavy liftingâ will likely be done first by other central banks such as those in Australia and Norway that have already begun to increase interest rates, Gross wrote. âChina may abandon its dollar peg within six monthsâ time and with it, its own easy monetary policy that has fostered more significant mini-bubbles of lending and asset appreciation on the Chinese mainland,â he added. Chinaâs Currency China has kept its currency at about 6.83 per dollar since July 2008 to help sustain exports amid a global economic slump. Chinaâs trade surplus in October almost doubled from the previous month, to $24 billion. The nation, with the worldâs largest foreign-exchange reserves of $2.3 trillion, is the biggest creditor to the U.S., holding $798.9 billion of Treasuries as of September. âWith renewed upward appreciation of the yuan may come potentially volatile global asset price reactions to the downside -- higher Treasury yields, and lower stock prices -- which the Fed must surely be leery of before making any upward move, of its own,â Gross wrote. The U.S. economy grew in the third quarter for the first time in more than a year as gross domestic product increased 3.5 percent from July through September after shrinking the previous four quarters, a Commerce Department report showed on Oct. 29. Gross advised following the lead of billionaire investor Warren Buffett on buying utilities because their earnings growth will mimic U.S. economic growth and provide steady dividend income. Buffettâs Berkshire Hathaway Inc. agreed this month to take over Burlington Northern Santa Fe Corp., the No. 1 U.S. railroad, for $26 billion. Fund Returns The Total Return Fund managed by Gross boosted its investment in Treasuries, so-called agency debt and other government-linked bonds to 48 percent of assets in September from 44 percent in August, according to Pimcoâs Web site. The holdings were the most since August 2004. The $192.56 billion Total Return Fund yielded 18.29 percent in the past year, beating 54 percent of its peers, according to data compiled by Bloomberg. The one-month return is 1.11 percent, outpacing 59 percent of its competitors. Pimco is a unit of Munich-based insurer Allianz SE. To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net. Last Updated: November 19, 2009 21:36 EST