Andy Xie

Re: Andy Xie

Postby winston » Tue Aug 04, 2009 8:01 am

Another long article from Andy Xie. He has good ideas but he always use too many words..

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Chinese stock and property markets have bubbled up again. It was fueled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100% overvalued. The odds are that both will adjust in the fourth quarter. However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future. The bursting will happen when the US dollar becomes strong again. The catalyst could be serious inflation that forces the Fed to raise interest rate.

Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn’t enough liquidity to feed the beast.

Liquidity isn’t a constraint yet. Even though loans grew by 24.4% in the first half or Rmb 7.4 trillion, loan-deposit ratio increased only to 66.6% in June 2009 from 65% in December 2008. It means that many loans have not been spent in real economic activities and have merely supplied leverage for asset market transactions. China’s property market is very similar to Hong Kong’s in 1997.

The origin of the asset bubble in China is excess liquidity as reflected in high level of foreign exchange reserves and low loan deposit ratio. The low interbank rate defines how serious excess liquidity s. The massive buildup of liquidity in China was due to weak dollar and strong exports. As dollar entered a bear market in 2002, China’s Rmb followed it down. The appreciation expectation drove liquidity to China. One fourth of China’s foreign exchange reserves could be due to this factor.

China’s productivity rose rapidly after it joined the WTO. The massive buildup in infrastructure and the relocation of manufacturing sector to China pushed up Chinese labor’s productivity rapidly. At the same time, Chinese currency declined as it rose against the dollar less than its decline. The combination of rising productivity and weak currency led to the massive export growth. The resulting dollar earnings pumped up China’s monetary system.

While China is experiencing weak exports now, the weak dollar allows China to release the liquidity saved up during the boom in the past five year without worrying about currency depreciation. How far would the bubble go and for how long?

It is not too hard to understand when the bubble would burst. When the dollar becomes strong again, liquidity could leave China sufficiently to pop the bubble. What’s occurring in China now is no different from what happened in other emerging markets before. Weak dollar always led to bubbles in emerging economies that were hot at the time. When the dollar turns around, the bubbles inevitably burst.

It is difficult to tell when the dollar will turn around. The dollar went into a bear market in 1985 after the Plaza Accord and bottomed ten years later in 1995. It then went into a bull market for seven years. The current dollar bear market began in 2002. The dollar index (‘DXY’) has lost about 35% value since. If the last bear market is of useful guidance, the current one could last until 2012. But, there is no guarantee. The IT revolution began the last dollar bull market. The odds are that another technological revolution is needed for the dollar to enter a sustainable bull market.

However, monetary policy could start a short but powerful bull market for the dollar. In the early 1980s Paul Volker, the Fed Chairman then, increased interest rate to double digit rate to contain inflation. The dollar rallied very hard afterwards. Latin American crisis had a lot to do with that.

The current situation resembles then. Like in the 1970s the Fed is denying the inflation risk due to its loose monetary policy. The longer the Fed waits, the higher the inflation will peak. When inflation starts to accelerate, it would cause panic in financial markets. To calm the markets, the Fed has to tighten aggressively, probably excessively, which would lead to a massive dollar rally. This would be the worst possible situation: a strong dollar and a weak US economy. China’s asset markets and the economy would almost surely go into a hard landing.

How far the bubble would go depends on the government’s liquidity policy. The current bubble wave is very much driven by the government encouraging banks to lend and the super low interbank interest rate. As the Fed’s interest rate is zero, the dollar is weak, China’s foreign exchange reserves are high, and the loan deposit ratio is low, China could increase liquidity, which would expand the bubble further. However, other considerations may motivate the government to cool it off.

If the government pumps all the liquidity it can, it wouldn’t have any ammunition left to revive it when it comes down. If the global economy has revived then, Chinese economy may have a soft landing with strong exports. The asset markets will certainly have a hard landing. However, if the global economy remains weak then, which is my view, both asset markets and the economy would have a hard landing. The political cost may be too great for the government to risk it all now.

A less risky approach is to adopt a stop-and-go approach. The government releases a wave of liquidity like now and then turns off the tap. Markets will run out of steam when it is all absorbed. When markets fall low enough, the government could release another wave to revive them. This approach makes the ammunition last and limit the bubble size, which contains the damage when the bubble eventually bursts. I suspect that that would be the government’s policy. If the global downturn remains for the next few years, we could see that China’s property and stock market experience big fluctuations every year. The downward movement of the current wave may happen around the National Day.

Many would argue that China isn’t experiencing a bubble. The high asset prices just reflect China’s high growth potential. One can never make an ironclad case to pin down an asset boom as a bubble. An element of judgment based on experience is inevitable when one calls a market boom a bubble. I have had a reasonably good record at calling bubbles in the past. I wrote my doctoral thesis arguing that Japan was a bubble in late 1980s, a long report at the World Bank in earl 1990s arguing that Southeast Asia was a bubble, research notes at Morgan Stanley in 1999 calling dotcom boom a bubble, and numerous research notes from 2003 onwards arguing that the US property market was a bubble. On the other hand I have never called something a bubble that turned out not to be a bubble.

I want to make myself perfectly clear on China’s asset markets today. They are a big bubble. Its bursting will bring very bad consequences for the country. However, as so many are enjoying what’s going on, I don’t think the government would act preemptively to eliminate the bubble. Indeed, many, if not the majority, in the policy circle argue that the bubble is good for reviving the economy. This sort of thinking seems to work because the dollar is weak, as the bubble can be revived with more liquidity when it cools off. When the dollar revives, China’s asset markets and, probably, the economy would have a hard landing. I hope that the people who advocate the benefits of the bubble would stand up then to accept the responsibilities for the damages.

The most basic approach in studying bubbles is to look at valuation. For property the most important measures are price to income ratio and rental yield. China’s average price per square meter nationwide is quite close to the average in the US. The US’s per capita income is seven times China’s urban per capita income. The nationwide average price is about three months of salary per square meter, probably the highest in the world.

As far as I can tell, a lot of properties can’t be rented out at all. Those that can bring in 3% yield, barely compensating for depreciation. The average rental yield, if one including those that can’t be rented out, is probably negligible. China’s property price doesn’t make sense from affordability or yield perspective. Some argue that China’s property is always like this: appreciation is the return. This is not true. The property market dropped dramatically from 1995-2001 during a strong dollar period.

A special angle in China’s property bubble is its role in local government finance. As land sales and taxes from property sales account for a big portion of local government revenues, they have powerful incentives to pump up the property market. Land sales are often carefully managed to spike up expectation. For example, those who bid extraordinarily high prices for land are laurelled as land kings. Lately, the land kings are often state-owned enterprises. When state-owned enterprises borrow from state owned band and give the money to local governments at land auctions, why should the prices be meaningful? The money circulates within the big government pocket. Tomorrow’s non-performing loans, if land prices collapse, are just today’s fiscal revenues. If private developers follow the SoEs to chase the skyrocketing land market, they could be committing suicide.

The stock market is in a final frenzy again. The most ignorant retail investors are being sucked in by the rising momentum. They again dream of getting rich overnight. As in the past, retail investors usually lose, especially like the ones jumping in now. The final frenzy usually doesn’t last. The turning points in China are often related to political calendar. Retail investors hold the popular belief that the government won’t let the market drop before October 1, the 60th anniversary of the PRC. Last time it was the 17th Party Congress in October 2007. This sort of belief is self-fulfilling in the short term. The market tends to roll over around the time. If the past is of meaningful guidance, this wave will taper off before October.

The idea that the government wouldn’t let the market drop is rooted in Chinese market psychology. In financial jargon, it is called a put option. During the Greenspan era, financial markets believed that he would always bail out markets in a crisis, which was the so-called Greenspan put. The belief in China should be called the Panda put. However, in reality, the government couldn’t reverse the market trend when it turns. Chinese stock market has big ups and downs in the past, which shows the government’s inability to stop the market from falling. Nevertheless, this imaginary put option remains deeply rooted in popular psychology.

Many policy thinkers believe that bubbles are not that harmful. One popular theory is that in a bubble money is passed from one person to another and, as long as it remains in China, no permanent harms can be done. Hence, if people are happy now and unhappy tomorrow, they just cancel each other. They should look at Japan and Hong Kong to see how much damage a bubble can do even without leaking money out of a country.

In a bubble resources are diverted to bubble making activities. The resources will be permanently wasted. For example, businessmen in China are reluctant to focus on real economic activities and are devoting time and energy to market speculation. It means that China wouldn’t have many globally competitive companies in the future. Even though China has had three decades of high growth, few companies are globally competitive. The serial bubble making in the Chinese economy may be the reason.

A generation of young people is not interested in real jobs and is addicted to stock market speculation. They see their holdings changing in value in a day more than their monthly salary and have the illusion that they would make a lot of money in the market. Of course, most of them will lose everything and may take extreme actions afterwards. The social consequences could be quite serious.

A property bubble usually leads to overbuilding. The empty buildings represent permanent losses. Most people would laugh at such a possibility in China. After all, 1.3 billion would need unlimited properties. The reality is quite different. China’s urban living space is 28 square meters per person, quite high by international standard. China’s urbanization is about 50%. It could rise to 70-75%. Afterwards the rural population would decline on its own due to its high average age. So China’s urban population may rise by another 300 million people. If we assume they all can afford property (a laughable notion at today’s price), Chinese cities may need an additional 8.4 billion square meters.

China’s work-in-progress is over 2 billion square meters. There is enough land out there for another 2. The construction industry has production capacity of about 1.5 billion square meters per annum. Absolute oversupply, i.e., there aren’t enough people for all the buildings, could happen quite soon. When it happens, the consequences are quite severe. Property prices could drop like Japan has experienced in the past two decades, which would destroy the banking system.

The most serious damage that a property bubble inflicts is in changing demographics. High property prices bring down birth rates. When property prices decline after a bubble bursts, the low birth rate culture cannot be changed. Hong Kong, Japan, Korea, and Taiwan all went through property bubbles during their development. Their birth rates dropped during the bubbles and didn’t recover afterwards despite government providing incentives. China’s one-child policy alone will lead to a demographic catastrophe in two decades. The property bubble makes the trend irreversible: when the government abandons the one-child policy, there wouldn’t be meaningful impact on birth rate. Within two decades Chinese population could be very old and declining. Of course, property prices would be very low and declining also.

In addition to net losses the redistribution aspect of a bubble has serious social consequences too. In the stock market bubble most households lose and a few win big. China’s wealth inequality is already very high. The bubbles make it worse. A sizable or even the majority of China’s population may not have meaningful wealth even after China’s urbanization is complete. It will lead to an unstable society. A market economy is stable and efficient when the majority has meaningful wealth and, hence, has a stake in the system.

In summary, the market frenzy now won’t last long. The correction may happen in the fourth quarter. There could be another wave of frenzy next year as China can still release more liquidity. When the dollar recovers, possibly in 2012, China’s property and stock market could experience collapses like during the Asian Financial Crisis.

http://www.my1510.cn/article.php?id=e3fc777cdd24720a
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Re: Andy Xie

Postby winston » Thu Aug 06, 2009 7:44 am

So you dare to short China ?

Riding the China Tiger By RANDALL W. FORSYTH

Bubble nemesis Andy Xie says look out for a fourth-quarter correction in soaring China market

"PONZI SCHEME" gets thrown around a lot since Bernie Madoff made it part of the popular vernacular but it's worth paying attention when Andy Xie uses it.

"Chinese asset markets have become a giant Ponzi scheme, writes the highly regarded former Morgan Stanley Asian economist, Andy Xie. "The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn't enough liquidity to feed the beast."

The Shanghai Composite has nearly doubled from its lows last November, leaving the rallies in Western bourses in its dust. The rally in China also has produced the frenetic trading that are hallmarks of a bubble.

According to Canaccord Adams Morning Coffee research note, turnover in China's stock market hit $63 billion on July 29 -- exceeding the combined $58 billion combined volume in New York, London and Tokyo that day. And the latter would include the $1 billion average daily volume in the popular iShares STSE/Xinhua China 25 exchange-traded fund (ticker: FXI) on the New York Stock Exchange.

Others argue that high asset prices in China aren't a bubble but a reflection of the nation's high growth potential.

"An element of judgment based on experience is inevitable when one calls a market boom a bubble. I have had a reasonably good record at calling bubbles in the past," Xie asserts with no false modesty.

"I wrote my doctoral thesis arguing that Japan was a bubble in late 1980s; a long report at the World Bank in early 1990s arguing that Southeast Asia was a bubble; research notes at Morgan Stanley in 1999 calling dot-com boom a bubble, and numerous research notes from 2003 onwards arguing that the U.S. property market was a bubble. On the other hand, I have never called something a bubble that turned out not to be a bubble."

China's property market has been bid up to levels that rental yields on commercial real estate are negligible, leaving price appreciation the only source of return, Xie explains. Moreover, local governments depend on taxes from property sales, so they keep prices aloft by carefully controlling land sales. State-owned companies borrow from state-owned banks to buy land from local governments. "The money circulates in the big government pocket." But the bubble results in overbuilding that leads to the bust and a surge in bad loans.

The stock market, he continues, is in the final frenzy. "The most ignorant retail investors are being sucked in by the rising momentum. They again dream of getting rich overnight."

That's especially true of the young, who can see their holdings gain more in value in a day than their monthly salaries, Xie continues. They usually lose, but the idea that government won't let the market drop is rooted in Chinese market psychology, especially before Oct. 1, the 60th anniversary of the Peoples Republic. "This sort of belief is self-fulfilling in the short term. The market tends to roll over around the time. If the past is of meaningful guidance, this wave will taper off before October," says Xie.

As always, bubbles are inflated by excess liquidity.

"How far the bubble would go depends on the government's liquidity policy. The current bubble wave is very much driven by the government encouraging banks to lend and the super low interbank interest rate. As the Fed's interest rate is zero, the dollar is weak, China's foreign exchange reserves are high, and the loan-deposit ratio is low, China could increase liquidity, which would expand the bubble further. However, other considerations may motivate the government to cool it off."

If so, China may engineer a soft landing for the economy -- if the global economy recovers -- but it would still mean a hard landing for asset markets. "However, if the global economy remains weak then, which is my view, both asset markets and the economy would have a hard landing," Xie concludes.

The key will be the dollar. The economist contends that weak dollar periods have always spurred emerging-market rallies as capital floods into those sectors, which is reversed when the dollar recovers. Not coincidentally, China and other emerging markets are at highs while the Dollar Index is declining and closing in on its record lows.

Xie thinks Chinese authorities will try to deflate the bubble in a stop-go fashion—withdrawing liquidity to bring down prices and expanding once they are deflated. The correction could begin in the fourth quarter but could lead to a renewed frenzy in 2010 when a new wave of liquidity is released, he says.

The ultimate end of the China bubble will come when the dollar reverses course from Federal Reserve tightening policy similar to the Volcker era in 1979-82 to counter soaring inflation. That could result in a collapse like the 1990s Asian crisis. But Xie sees this as a risk for 2012.
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Re: Andy Xie

Postby winston » Fri Aug 07, 2009 9:03 am

TOL:-

I cant see the USD rising due to an increase in US interest rates, in the near future. If there's a collapse in the USD, then they may increase interest rates...

In addition, any rise in the USD is the "EFFECT" not the "CAUSE". When money flow back from risky assets eg. Chinese shares to USD, then the USD will rise, not the other way round...

Maybe my simple mind cant understand complex economic models ..
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Re: Andy Xie

Postby winston » Tue Aug 18, 2009 7:47 am

China Stocks May Drop Further 10% on Loans, Xie Says (Update1)

Aug. 18 (Bloomberg) -- China’s benchmark stock index, the world’s worst performer this month, may fall another 10 percent as bank lending slows, said Andy Xie, a former Morgan Stanley chief Asian economist.

“The current correction is reflecting the tightening in lending,” said Xie, who correctly predicted in April 2007 that China’s equities would tumble. “We’ve seen the peak of this market cycle, though there’s likely to be a bounce as the government seeks to stabilize the market.”

Yunnan Copper Industry Co. posted a loss, saying there are “no clear signs” of a recovery.

Government Support

The government may order the national social security fund to support the market before Oct. 1, when the Communist Party celebrates the 60th anniversary of taking power, according to Xie. Other measures that may be taken include halting the approval of IPOs and share placements, he said.

“This is not the bursting of the bubble,” Xie, who is now an independent economist, said by telephone. “The government will be under pressure to take action because a lot of people have lost money.”

( So why didnt they try to support the market during the Olympics ? )

“A-share valuations look fully priced but I don’t think it’s a bubble like we saw with Internet stocks,” said Semple, who helps manage about $13 billion in commodities and equities including Hong Kong-listed H-shares at New York-based Van Eck, said in a phone interview. “I wouldn’t be surprised if we start to hear positive comments from the government.”

http://www.bloomberg.com/apps/news?pid= ... Sf0oHfImkg
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Re: Andy Xie

Postby winston » Mon Aug 24, 2009 2:14 pm

Economist Xie Says Hong Kong Property Will Fall When Rates Rise By Dirk Beveridge

Aug. 24 (Bloomberg) -- Hong Kong’s property market will fall when the U.S. Federal Reserve eventually needs to raise interest rates, former Morgan Stanley chief Asian economist Andy Xie said.

Near-zero interest rates by the Fed have encouraged property speculation in Hong Kong, Xie wrote in an opinion piece in the South China Morning Post today. Hong Kong pegs its currency to the U.S. dollar and the Hong Kong Monetary Authority tracks U.S. interest rates.

Xie, now an independent economist, predicted the situation will soon change, writing that when the Fed’s policy rate reaches 5 percent, probably in 2011, Hong Kong’s property prices will be 50 percent lower.

Source: Bloomberg
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Re: Andy Xie

Postby Poles » Mon Aug 24, 2009 4:03 pm

i think the same can be applied for Singapore.
ppl say >> 放 长线钓大鱼
i think this time with low rate >> 放长网捕获许多鱼
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Re: Andy Xie

Postby kennynah » Mon Aug 24, 2009 4:08 pm

if one has a fully paid up high end property in HK...he should go to his banker... get them to set up an exotic call option and WRITE that to any takers.... ie; establish a Covered Call at a higher than current market price...

so, i market price drops...the premium received mitigates some pain.... if price surges past that Call strike... sell the property for a handsome profit lor....
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Re: Andy Xie

Postby winston » Tue Sep 01, 2009 7:37 am

Shanghai Index May Drop 25% on Economy, Xie Says (Update1) By Allen Wan and Erik Schatzker

Sept. 1 (Bloomberg) -- The Shanghai Composite Index, the world’s worst performer in August, may fall another 25 percent as China’s economic recovery isn’t “sustainable,” former Morgan Stanley Asian economist Andy Xie said.

The measure plunged 6.7 percent to 2,667.75 yesterday, the most since June 2008, and entered a bear market on concern a slower lending growth may derail a rebound in the world’s third- largest economy. Xie said the index “should be 2000 or less.”

“The market is in deep bubble territory,” Xie, 49, who correctly predicted in April 2007 that China’s equities would tumble, said in an interview with Bloomberg Television.

Strong Numbers

“The local market bears are convinced that tightening is already underway,” said Howard Wang, head of the Greater China team at JF Asset Management, which oversees $50 billion. Only “a very strong set of macro numbers in August” or “stronger statements from central authorities” would change this trend, Wang said.

“The A share market is undergoing a correction rather than a bursting of the bubble,” said Richard Gao, who helps manage $2.8 billion at Matthews International Capital Management LCC in San Francisco. “Short term trading will be very volatile but we believe a strong economic recovery is underway in China and remain quite positive on the long-term growth potential.”

The government will maintain its fiscal and monetary policies because the economy faces many “uncertainties,” Premier Wen Jiabao said this month. Economic growth will slow in the fourth quarter as exports remain mired in a slump, Xie said.

“The recovery is not sustainable,” Xie, who resigned as Morgan Stanley’s chief economist in Asia in 2006 and now works as an independent economist, said in the interview yesterday from Shanghai.

Expectations

“This is a short-term negative,” said E. William Stone, who oversees $101 billion as chief investment strategist at PNC Wealth Management in Philadelphia. “Expectations have been too high that China would be a driver of everything. Much has to come out of the expectations balloon.”

At least 150 stocks on the 898-member Shanghai index dropped by the daily 10 percent limit. Industrial Bank Co. and Aluminum Corp. of China Ltd. tumbled by the permitted cap after Caijing magazine reported new loan growth this month may be almost half that of July. Lower profits dragged Baoshan Iron & Steel Co., the nation’s biggest steelmaker, and China Southern Airlines Co. down at least 7 percent.

The Shanghai index trades at 29.39 times reported earnings, according to Bloomberg data. The MSCI Emerging Markets Index, a 22-country benchmark, trades for 18.9 times profit.

“The government is now pulling the plug on liquidity,” said Xie, who is a guest columnist for Caijing. “Hopefully, it’s not too late.”

Source: Bloomberg
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Re: Andy Xie

Postby BlackCat » Wed Sep 30, 2009 9:55 pm

Not a bad article. Abt the US, on how the current market run is a bubble, one which has few benefits to the economy, and which is preventing reforms:
Andy Xie: Why One Bubble Burst Deserves Another: http://english.caijing.com.cn/2009-09-28/110267252.html

Points:
- 10 trillion spent shoring up financial system, but no reform. "Indeed, a lot of the big shots who brought down the world are still out there running things."
- Current bubble gives no benefits other than to stop banks collapsing (unlike for example the tech bubble which gave some benefits)
- US savings rate is up more than he expected, he's bullish on USD
- Believes the US mkt is peaking in Sept. (Personally I think a few more bears have to be slaughtered first, just my opinion).

The conclusion is below, I like the last line:

Our serial bubble making began 10 years ago with the Asian Financial Crisis. It led to loose monetary policy in developed economies, especially in the United States, and undervalued exchange rates in developing economies. The inflationary force from this loose monetary policy was kept down by excess capacity or capacity creation in developing economies. The environment for tolerating such a loose monetary environment ends when inflation surges in emerging economies first and developed economies second.

When inflation becomes a political problem and policymakers are forced to respond, money supplies will be cut. After that, no more bubbles.
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Re: Andy Xie

Postby mojo_ » Wed Sep 30, 2009 10:20 pm

BlackCat, thanks for article. My comments on this para from Andy

So Lehman died in vain. Today, governments and central banks are celebrating their victorious stabilizing of the global financial system. To achieve the same, they could have saved Lehman with US$ 50 billion. Instead, they have spent trillions of dollars -- probably more than US$ 10 trillion when we get the final tally -- to reach the same objective. Meanwhile, a broader goal to reform the financial system has seen absolutely no progress.

I have read some articles that argued that if Lehman was saved, Merrill, Morgan Stanley and others would have been next in line... a long succession of candidates for rescue. Those articles argued that Lehman's collapse precipitated such a major collapse that it provided the cover for politicians and CBs to do the unprecedented globally in one fell swoop rather than death by a thousand cuts... hence Lehman didn't die in vain.

US$50 billion to save Lehman and thus the whole system from collapse is a pipe dream... ;)
Not what but when.
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