Andy Xie is a former Morgan Stanley economist now living in China; The following is from the South China Morning Post:


The A-share market is collapsing again, like many times before. It takes numerous government policies and “expert” opinions to entice ignorant retail investors into the market but just a few days to send them packing. As greed has the upper hand in Chinese society, the same story repeats itself time and again.

A stock market bubble is a negative-sum game. It leads to distortion in resource allocation and, hence, net losses. The redistribution of the remainder, moreover, isn’t entirely random. The government, of course, always wins. It pockets stamp duty revenue and the proceeds of initial public offerings of state-owned enterprises in cash. And, the listed companies seldom pay dividends.

The truly random part for the redistribution among speculators is probably 50 cents on the dollar. The odds are quite similar to that from playing the lottery. Every stock market cycle makes Chinese people poorer. The system takes advantage of their opportunism and credulity to collect money for the government and to enrich the few.

I am not sure this bubble that began six months ago is truly over. The trigger for the current selling was the tightening of lending policy. Bank lending grew marginally in July. On the ground, loan sharks are again thriving, indicating that the banks are indeed tightening. Like before, government officials will speak to boost market sentiment. They might influence government-related funds to buy. “Experts” will offer opinions to fool the people again. Their actions might revive the market temporarily next month, but the rebound won’t reclaim the high of August 4.

This bubble will truly burst in the fourth quarter when the economy shows signs of slowing again. Land prices will start to decline, which is of more concern than the collapse of the stock market, as local governments depend on land sales for revenue. The present economic “recovery” began in February as inventories were restocked and was pushed up by the spillover from the asset market revival. These two factors cannot be sustained beyond the third quarter. When the market sees the second dip looming, panic will be more intense and thorough.

The US will enter this second dip in the first quarter of next year. Its economic recovery in the second half of this year is being driven by inventory restocking and fiscal stimulus.

However, US households have lost their love for borrow-and-spend for good. American household demand won’t pick up when the temporary growth factors run out of steam. By the middle of the second quarter next year, most of the world will have entered the second dip. But, by then, financial markets will have collapsed.

China’s A-share market leads all the other markets in this cycle. Even though central banks around the world have kept interest rates low, the financial crisis has kept most banks from lending. Only Chinese banks have lent massively. That liquidity inflated the mainland stock market first, then commodity markets and property market last. Stock markets around the world are now following the A-share market down.

By next spring, another stimulus story, involving even bigger sums, will surface. “Experts” will offer opinions again on its potency. After a month or two, people will be at it again. Such market movements are bear-market bounces. Every bounce will peak lower than the previous one. The reason that such bear-market bounces repeat is the US Federal Reserve’s low interest rate.

The final crash will come when the Fed raises the interest rate to 5 per cent or more. Most think that when the Fed does this, the global economy will be strong and, hence, exports would do well and bring in money to keep up asset markets. Unfortunately, this is not how our story will end this time. The growth model of the past two decades – Americans borrow and spend; Chinese lend and export – is broken for good. Policymakers have been busy stimulating, rather than reforming, in desperate attempts to bring growth back. The massive increase in money supplies around the world will spur inflation through commodity-market speculation and inflation expectations in wage setting. We are not in the midst of a new boom. We are at the last stage of the Greenspan bubble. It ends with stagflation.

Hong Kong’s asset markets are most sensitive to the Fed’s policy due to the currency peg to the US dollar. But, in every cycle, stories abound about mysterious mainlanders arriving with bags of cash. Today, Hong Kong’s property agents are known to spirit mainland-looking men, with small leather bags tucked under their arms, to West Kowloon to view flats. Such stories in the past of mainlanders paying ridiculous prices for Hong Kong flats usually involved buyers from the northeast. In this round, Hunan people have surfaced as the highest bidders. The reason is, I think, that Hunan people sound even more mysterious. But, despite all this talk, the driving force for Hong Kong’s property market is the Fed’s interest rate policy.

Punters in Hong Kong view the short-term interest rate as the cost of capital. It is currently close to zero. When the cost of capital is zero, asset prices are infinite in theory. At least in this environment, asset prices are about story-telling. This is why, even though Hong Kong’s economy has contracted substantially, its property prices have surged. Of course, the short-term interest rate isn’t the cost of capital; the long-term interest rate is. Its absence turns Hong Kong into a futile ground for speculation, where asset prices increase more on the way up and decrease more on the way down.

When the Fed raises the interest rate, probably next year, Hong Kong’s property market will collapse. When the Fed’s policy rate reaches 5 per cent, probably in 2011, Hong Kong’s property prices will be 50 per cent lower.

Andy Xie is an independent economist


Boom and burst
Don’t be fooled by false signs of economic recovery. It’s just the lull before the storm
Andy Xie
South China Morning Post Aug 24, 2009

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “Boom and burst: Don’t be fooled by false signs of economic recovery. It’s just the lull before the storm”

  1. [...] : Bubble will burst, next dip in 2010 August 24th, 2009 Leave a comment Go to comments (The Big Picture) has a highly fascinating, and not at all unrealistic analysis of how the second leg down of this [...]

  2. [...] Boom and burst: Don’t be fooled by false signs of economic recovery. It’s just the lull before t… [...]

  3. urbandigs says:

    As a near term discounting mechanism, somebody needs to tell this to equity markets!

  4. bdg123 says:

    Where was Andy back before the China bubbled collapsed in 2007? What are people to do now that they might have lost their life savings betting on the China myth?

  5. Pat G. says:

    “It ends with stagflation.”

    Thanks for confirming my theory. I feel much better. Sort of…

  6. mcHAPPY says:

    I would imagine the G20 meeting in Pittsburgh at the end of September will be more “We saved the world” rhetoric before (hopefully) realty sets in.

  7. [...] sure to check out Andy Xie’s Boom & Burst discussion in the Think [...]

  8. Vilgrad says:

    The storm will be worse than anyone can conceive. We must destroy the FED.

  9. jrm says:

    I can’t wait for 2011 to buy a flat in Repulse Bay ahah

  10. franklin411 says:

    I’m sure the People’s Komissar for Information approved this “educational” piece.

    What a load!

  11. hopeImwrong says:

    Bears like Andy are in the process of being discredited.

  12. VennData says:

    “…However, US households have lost their love for borrow-and-spend for good. American household demand won’t pick up when the temporary growth factors run out of steam…”

    “For good?”” Spoken like a true prognosticator …who doesn’t understand American culture.

  13. BSNEATH says:

    I believe he is right. Americans are getting older and old farts do not buy much stuff. That coupled with an all time high in consumer debt and you have the makings for a permanent change in household demand.

  14. sinomania says:


    Absolutely. Hong Kong property values will fall with Fed policy and are influenced by mainland cash…no duh. Andy has been warning that the world can’t go on with the China-USA you-buy-our-stuff-we-buy-your-paper since 2003 at least. Morgan Stanley Asia has driven this point into the ground. But the USA can not just resurrect its manufacturing sector nor will Americans ever give up the consumer culture. And China still has BILLIONS of potential customers in the Indian subcontinent, the middle East, central Europe, Latin America, and Afrida to sell too. I love Andy Xie’s writing. His pieces are always succint and accessible but this latest is fluff.

  15. Cohen says:


    I think it’ll be interesting to see how it plays out and I fall more into the “consumer’s not coming back” camp because the debt that fueled the spending isn’t and won’t be available. I also believe that the demand for the debt won’t be there either.

  16. [...] suggestion that we may be in for a “W-shaped” recovery. Here are some comments via The Big Picture from Andy Xie, former Morgan Stanley economist. His thoughts are from a Chinese perspective and use [...]

  17. adbutler007 says:

    A good rant, and some good posts on this at

  18. Onlooker from Troy says:


    Yep. Those who cynically say that the American super-consumer is dead don’t take into account the fact that they ran into the wall with the pedal floored. They’re dead. And there’s no more easy credit and our job market/economy is dysfunctional and wages are going to be further depressed by that and global wage arbitrage continuing.

    So it’s not because they’ve become wonderfully frugal and conscientious all of a sudden (with some exceptions, of course). But the credit card has been effectively cancelled for lack of ability to service the debt. It’s not complicated.

  19. VangelV says:

    While Andy may finally turn out to be right, why is he taken as a credible voice when he has been wrong for about 15 years? The individual who followed his advice would be much poorer than the the individual that did the opposite of what Andy has suggested.

    Let me be clear about one thing in my criticism of Mr. Xie. I do not discount the possibility of a major bout of volatility in the Chinese markets so I agree about the risks. But a long term investment in Chinese companies that are well run is not a bad bet over the longer term even with this volatility and with the inevitable declines. The simple fact is that China is investing in its infrastructure and is accumulating capital that can be put to productive use, even if that use was not what the initial investors intended. Contrary to what Andy has been implying in the past, the Chinese are not better off because they exchange the real goods that they produce for US dollars that are used to purchase treasuries and paper assets. For China to move forward it will have to use its substantial capacity to build more products for its own citizens and to make much less for Americans who are broke and unable to afford the goods that they used to buy in large quantities from China.

    This is not to say that the US has to collapse if the government gets out of the way because the US manufacturing sector still makes many products that are in demand and is much more productive than it has ever been. (It would be even more productive if the US government let the inefficient companies go bankrupt but that is a subject for another post.) The problem with the US is its expanding government and a regulatory system that has grown under every president since Eisenhower. The path to salvation lies with freer markets and less government. Fortunately for the Chinese people, its government has chosen to reluctantly follow such a path. Unfortunately, the West seems to be going the wrong way.

  20. [...] suggestion that we may be in for a “W-shaped” recovery, here are some comments via The Big Picture from Andy Xie, former Morgan Stanley [...]

  21. [...] Boom and Bust: Don’t be fooled by false signs of economic recovery.  It’s just the lull before the storm By Barry Ritholtz – August 24th, 2009, 2:30AM==>Andy Xie is a former Morgan Stanley economist now living in China; The following is from the South China Morning Post:  continue with link…..the-storm/ [...]