Andy Xie on New Economy's Birth Pains

The language in Xie's article echoes that used in a Chinese article a couple of weeks ago: China's Real Estate Market Is Being Baptized Into The Market Economy.

The whole article is good, and in English, so click through to read it. Here's the concluding section.

The Birth Pains of a New Economy

The most damaging aspect of the bubble is to distort value among investors and businesses. Over the past decade, making quick money through government connections and speculation has become dominant. This is why, despite the massive increase in GDP, few competitive companies have emerged. The companies that command public and policy attention are in finance and property. Successful speculators have become today's heroes.

The deflating property bubble will destroy speculators. As they are so prominent in the economy, the pain is acute to them and the economy. This process is absolutely necessary. Unless entrepreneurs, businesses, investors, and government officials go back to focus on creating lasting value, China's economy cannot go forward.

China's rise depends on working hard and saving money. When people forget these traditional values and embrace speculation, the country goes backward. Deflating the property bubble is the birth pain for a new economy. It must happen.

The one point I'd add is that speculation cannot be sustained without credit. The key is the government's hands off approach in the credit market: monetary policy has been mostly unchanged and the market itself is reigning in credit.

谢国忠 Andy Xie: Per SQM Prices Will Drop to 2 Times Monthly Salary

Andy Xie in a recent interview said that property prices will fall to around two months wages or lower. Xie points out that the government cannot change long-term supply and demand, thus short-term measures have limited effect. Currently, were Xie's prediction to be correct, property prices in most cities would have to fall by 50-80%. In Beijing, the average salary is about 66,000 yuan per year, which is 11,000 yuan for two months. In Beijing, the land sells for nearly as much. Recently, the average price is close to 40,000 yuan per sqm. Strong wage growth can lift the floor though, and wage growth is one of the main policy goals of the current leadership. The common wisdom is that China needs 7% GDP growth to keep the public happy, but in reality people wage growth and disposable income are the keys.

Andy Xie also points out the pressure from high money and debt creation, something I wholeheartedly agree with. Either the currency depreciates or the prices in the currency will tumble, in this case home prices. China cannot turn off the laws of economics; the central government merely has more power than most to direct where the force flows. The free market would adjust with a double devaluation in currency and asset prices. To the extent the PBOC refuses to let the yuan to fall, it will lead to higher nominal price declines internally and most likely falling reserves, as the offshore yuan price dips and needs to be defended.

China can escape with less damage thanks to higher potential growth rates, but it cannot escape the laws of economics. Even if all the trillions of yuan in stimulus and loans were put to productive use, the country would still face great deflationary pressure (inflating here would solve the deflationary pressure, but would cause high inflation and increase the pressure on currency devaluation). That much of the capital was not put to good use will lead to a more painful adjustment.

谢国忠：每平米房价最终会降到2个月平均工资以下

Since the end of last year, China's real estate market began to decline. With the volume and price down, some cities have begun to introduce micro-stimulus policies, the market multiple voices heard.

In the end how to look at the current situation? How will the future? Declining trend in the real estate industry, what will have what effect? " First Financial Daily "interview, an independent economist Andy Xie , vice-president of the China Real Estate and Housing Research Association Gu Yunchang, a research director at State C Du Index Academy.

Rates will be a wave upon wave adjustment

First Financial Daily: how do you judge the current market situation, the bubble has burst, the inflection point , or short-cycle adjustment?

Gu Yunchang: I think it is a combination of both short-period adjustments and inflection point. But the turning point there are two explanations, one is a small turning point, one is a big turning point, the big turning point was positive growth to negative growth, small turning point is the slowdown. I am willing to current market conditions as a small inflection, sales growth decline, but unlikely to go down.

While this is cyclical correction, because the real estate market is to buy or not to buy, after the introduction of a policy, or economic situation changes, it is prone to wait and see. After watching some of the backlog of demand will subsequently released. April 2010 to the end of 2011, the whole is declining, but in 2012 after the sudden broke out, to keep this momentum into 2013. 2014 slowed the demand for the release, in fact, from last year's fourth quarter of stabilized, which is the objective of the small property cycle, is now in a small downward cycle stages.

Andy Xie: 2012 is a turning point, a partial rebound in 2013, primarily a second-tier cities, some of the four-tier cities is almost no sales. Four-tier cities obviously supply is too large, and people with limited incomes. Tier cities are now price bubble, four-tier cities is the amount of foam.

China is expected to change by regulation and create some demand, but can not change the long-term real estate supply and demand.

I think the prices will be adjusted wave after wave, because there will be changes in government regulation of people expected to happen, but how many final adjustment, the game will depend on the power of government regulation and market forces determine the price is not so easy to make. I think prices will drop per square meter final two average monthly wage or less.

Du State C: In the urban market increased differentiation, watching the atmosphere is getting stronger and the same period last year, under the influence of the high base, from January to April this year, China's real estate market performance is slightly sluggish. However, the medium to long term, China's real estate market is still in the range continued to expand upward, the current "inflection point" just change the expected impact of short-term fluctuations, the national real estate market in 2014 will show a "sales price continued to grow but at a slower release Slow, steady growth of investment in new construction "features.

Daily: How to explain the reasons for the decline in this round?

Gu Yunchang: real estate in addition to market factors, but also by the macroeconomic impact of the real estate control policies. Macroeconomic level, now China's economic slowdown will inevitably lead to the real estate market slowdown, which is complementary. Impact on the real estate is mainly monetary policy is now steady tight, since the fourth quarter of last year, the real estate credit is tight, resulting in a lack of funds the real estate market, sales slowed.

As the real estate control policy itself, nothing changes at the national level, in fact, now the situation is changing macroeconomic major credit policies and real estate cycle, resulting in a relatively down-market. 2012 we forecast in 2013 after the former high stability, in fact, is true. Completely different this year, after the former can achieve low stabilization, but also macroeconomic developments and monetary policy situation, and also whether to adopt a liberal policy for the country.

Andy Xie: Housing estate bubble is a manifestation of a huge monetary bubble, and this bubble has started down it. Currency is two lines, a look at the currency is not devalued, two people can borrow money to see you there. Now high household debt, local governments have borrowed so much money, currency devaluation pressure there, adding up money bubble go elsewhere, so the real estate bubble also go elsewhere.

Local government will relax the regulation

Daily: now part of the city control policies change, how will the next evolution?

Gu Yunchang: severe real estate market differentiation, and the real estate market characteristics about this, this is a regional market. The same tier cities are also differences. Under such circumstances, the government work report clearly calls for the classification regulation, so there are a number of local fine-tuning, or a micro-stimulation.

Local governments are actually regulate the existing authority, the impact of the real estate market is mainly macroeconomic policy, especially monetary policy, as well as real estate control policies. The former local government has no right to change, whether the latter is a local master domicile restriction , whether tax subsidies, there is the supply of the loan fund. Now it seems that the local government bailout mainly on three aspects.

On a local brewing fine-tuning, the intervention was immediately lost, and this one is no intervention, it seems also reasonable, should not affect the four-tier cities or more second-tier cities. Currently tier cities have not seen such signs, Beijing and Shanghai also requires a certain observation period, although there are some loose discounted, yet circumstances require government actions to reach.

Andy Xie: bailout useless, just to give you an illusion, so that we market. The purchase is blowing bubbles force the purchase of a sudden feeling of forming a shortage, leading everyone to buy a house.

Local government to relax the regulation will certainly spread to, will continue to think of various ways to come out. But unlikely to be effective in the four-tier cities, because the people had no money, so there are a large amount.

Du State C: local government bailout while and will not break the central regulation of tone and boundaries. Lack of demand, excess supply of four-tier cities will be the first adjustment measures are expected to mostly "open source" type, that is to relax the demand side, by relaxing the restriction conditions, lower down payment and loan interest rates, tax incentives and other means to stimulate market demand, accelerate stock to melt.

Prior to housing prices in some second-tier cities, will also join the ranks of policy adjustment. Hot line and second-tier cities, housing prices in the face of greater pressure on space and the possibility of policy changes will be relatively small.

After the first stage of fine-tuning a number of cities, the central front so as not to interfere. As can be seen, although the central level to keep track of changes in the real estate market attention, but do not want to introduce more administrative measures to regulate.

Smooth return premium trend

Daily News: Local Government has said anxious than the developers, the current situation will have what effect on the land finance and local development?

Gu Yunchang: developers anxious than local government, I think there is some truth to these words, because the slowdown in real estate sales, developers are expected to change, not actively take, construction slowed down, it will affect the local land revenue as well as real estate tax revenue, while Local governments are still highly dependent on both.

Du State C: January to April, representatives of area housing prices get down more obvious, covers, planning construction area of ​​decline was 19%, 26%, but an increase in the number of cases to get to, just to get to a slight decline in the amount of 3%. We believe that companies take to reduce the principal that the majority of enterprises to enter the housing stock of existing land digestion period, and the current complex market situation allows businesses slowed down the flow of capital, to a certain extent, affected the take to the expectations and funding.

As businesses get to more rational and stable return land to become a general trend, in 2014 four-tier cities will have tight fiscal land.

To acknowledge the real estate market bubble

Daily News: Real estate current situation will affect how the Chinese economy?

Gu Yunchang: China made steady economic growth, if a severe real estate downturn, will inevitably affect the stability of the growth process. Because the real estate construction area, new construction area, the number of land sales decline, will involve the construction and real estate-related, building materials industries, real estate is still a pillar industry. Real estate investment accounted for the proportion of total fixed investment of about 20% to 25% decline in real estate investment, will lead to a decline in investment in other sectors of the country's investment growth drop-down effect is obvious.

I think the local governments and the central government will not tolerate serious decline, adjustments are inevitable, but the hope is that a soft landing, the local government will help fine-tune a soft landing.

Now the real estate market to admit there is a bubble, the bubble is not small in some cities. Some cities have to wait and see mood, tighter credit, if you do not take timely measures, will produce great risk. In addition to the local fine-tune monetary policy fine-tuning may be necessary, for example, on the first mortgage, just need support, to ensure that. But not as strong as the 2008 stimulus, will form a new bubble.

Andy Xie: have an impact on the economy, but it is not a bad thing, the real estate industry down, its related industries such as construction, engineering machinery industry is not good, but after this adjustment, the middle-class consumer expectations like it, household consumption will increase. We worry about the effects will be transmitted to the Chinese labor market, but labor shortages are common, so the economic downturn will not have much impact.

The overall risk control

Daily: the current real estate market situation, will have an impact on financial stability? Bank of tolerance is how much?

Gu Yunchang: If the real estate risk, will inevitably affect the financial, the two are linked, the so-called real estate bubble is actually a financial bubble, real estate finance depends mainly on the cold cold. China's real estate market downturn, money is tight and relevant, in the center did not ease monetary policy fine-tuning of the cases, only rely on local government to fine-tune.

2008,2009 said, if house prices fall by 30%, the financial sector can bear, and now we think, too, of our financial leverage is not high. Real estate-induced financial risk, I think it is not essential.

Andy Xie: China human heart that banks will not let the house plunges, this is a psychological play. Now consider the bank's NPL ratio has exceeded 10% of the stock market, but less than 1% reported out, I know a lot of far more than the bank's NPL ratio of 10%.

Du State C: end of the first quarter of 2014, real estate loans 15.42 trillion yuan, 797.1 billion yuan added, representing the proportion of loans were 20.6% and 26.5%.

From the buyers perspective, if housing prices dropped significantly, there will be financial risks similar to the subprime crisis, housing loan default risks. For businesses, the prices quickly dropped significantly, causing consumer sentiment, leading to further deterioration in corporate sales, which transfer to the financial markets, non-performing loans, defaults and so will increase the financial panic filled. The local government, housing prices fell by volume and price will play a stabilizing role in the land market, land heavily dependent on local government finances, local debt repayment will be difficult, financial systemic risk or outbreak.

But for now, we think that the overall risk of the real estate market is controllable, less likelihood of a sharp collapse in house prices; while guiding the country's financial sector is also increasingly strengthened gradually exclude systemic risk problems, the overall financial environment will remain relatively stable.

Housing prices accelerate shuffle

Daily: Housing prices will not occur wave of bankruptcies?

Gu Yunchang: After sales slowed down, it should be said in favor of big business expansion, mergers and eliminate dead batch no brand no weak financial strength of the company, it is normal, the Chinese real estate industry needs such a reshuffle. Housing prices in the current situation is the competition, shuffling accelerated thinning profits.

In fact, in recent years China Real Estate's net profit margin decreased year by year, in 2012 than in 2011 net profit margin decreased from 18% to 19%, still down from last year, and now the real estate listed companies net profit margin of only 10%, 8%, Real Estate high profits era passed.

Du State C: 2014, housing prices of A shares to refinance the gates opened, allowed to issue preference shares, housing prices will trend more apparent differentiation. We believe that the national distribution of leading enterprises, product type extends to future commercial office, industrial real estate related to housing prices, focus on the area of ​​product development, from the early development of competitive enterprises gradually transferred to local management of late, these three companies will remain relatively good development trend.

Prior to other enterprises, especially small and medium enterprises to expand too fast, it will face more severe financial challenge, some companies do not rule out the possibility of bankruptcy or merger.

Why Do Credit Bubbles Pop?

One of the great advantages of the Austrian school is that it does not use mathematics to try and divine the future. Rather, the key is to understand human behavior. In the case of credit bubbles, there is no magic percentage of GDP at which debt levels become unsustainable. Smaller nations and industries are obviously at the mercy of larger players. With no larger player, such as with a Chinese or American credit bubble, the bubble ends because people think it will end. As the bubble inflates, more and more people believe it will end. Then it is only a matter of the trigger event that crystallizes this belief. Thought becomes action and the bubble has burst.

Theoretically, a bubble can go on forever as long as people think it will keep going on, but this requires that people do not change their behavior or expectations. This never happens because people do respond to prices and incentives. Lower interest rates cause people to borrow more, which leads to higher growth and eventually higher prices (monetary inflation filtering through the economy). There is no equilibrium in the economy, ever. Real interest rates are either rising or falling and for a trend to continue, it requires that the trend never stop or that people perfectly change their behavior in the right proportions in order to keep the economy on an even keel. This doesn't happen because most people do not have great insight and instead use the wisdom of crowds: they follow the herd.

Will the failed trust product market by ICBC (see: Pop Goes the Trust; Chinese Investors Learn the Hard Way That Credit Does Not Equal Gold) be enough to change perceptions and change the direction of the market? It's hard to predict. I consider one thing: is the credit bubble large enough to justify a change in behavior? And if behavior changes, will the effects be great?

Credit bubbles require increasingly large amounts of new credit in order to keep the growth rate steady. It can be a constant rate of growth, but this results in increasingly large nominal numbers and since the credit is growing faster than GDP, it leads to an ever widening gap/rising debt-to-GDP ratio. Investors and business discount this amount of new credit and become accustomed to easy money. They do not worry about having cash because they feel secure with a line of credit. After 2008 hit, many people lost their credit access. Corporations saw the commercial paper market screech to a halt and some faced bankruptcy, with concern that even blue chips like General Electric (GE) could go bust due to an inability to roll over short-term debt. The result was that in the ensuing years, corporations issued hundreds of billions in new long-term bonds and stuck the cash on their balance sheets. Businesses also make long-term plans assuming the good times will continue. As the credit bubble grows, a smaller and smaller change in credit growth leading to a small change in GDP growth can have a major impact on an individual firm or sector in the economy, which sets off a chain reaction.

Who knows if China is at the point of a major trend change, but China definitely is at risk of a major trend change and has been for years. Here is Andy Xie on the topic: When the Giants Unwind

China's tightening is really about limiting local government borrowing. They are not interest rate sensitive. The current rise in interest rate is unlikely to dent their appetite. Indeed, China's local governments went to the shadow banking system for money at high interest rates in 2013, as banks have become wary of too much exposure to them. Local governments depend on the perception that provinces and, ultimately, the central government will bail them out, if they can't repay their loans. This is the reason that the shadow banking system is focusing on them. Private companies have been borrowing at low interest rates offshore and lending to them at high interest rate, either directly or through trust companies. Unless the bailout responsibility is clarified, China's credit bubble would continue.

If the central government spells out its position of no bailouts clearly and convincingly, the reaction in the credit market will likely be massive. The shadow banking system, for example, wouldn't roll over their loans. Unless the banks step in – probably forced by the government – a financial crisis is possible. If the banks do step in, it is actually a bailout by the central government, as it will be forced to bail them out if they go down. When moral hazard is the main reason for a credit boom, cooling it slowly is very difficult.

I have always argued that a hard landing would be a good thing for China. It flushes out all the financial excesses quickly and allows the economy to have a fresh start and soon. China's labor shortage ensures that such a landing wouldn't lead to social instability. Declining inflation would improve people's living standards. Hence, it's all good looking from the people's perspective. The banks and local governments wouldn't look at it that way. They all hope to stretch out the time horizon for paying off the legacy costs from the bubble. Or better that the people in charge now could walk away before the problems are exposed. Hence, the system's bias is to drag it out. But, a bubble grows larger if it doesn't burst. One cannot hold a bubble stable; it either shrinks or expands.

China is showing some resolve in reigning in the credit bubble. A credible anti-corruption campaign and rising interest rate are the visible signs. The tightening path is anything but assured. The system's bias for stable appearance may cause the policy to change direction.

I agree with his outlook. A hard landing is very possible, but it would also be very bullish for China. The anti-corruption campaign is extremely strict. Government officials, and almost anyone spending government money (which includes a lot of sectors such as education), cannot spend more than 20 yuan per person on meals, and they must eat buffet style. I know that some many departments have cancelled overseas trips and domestic travel that used to be a work/pleasure combination. The screws are tightening and the people fear Xi Jinping means business. That is a good thing, but it also means that if the credit market tightening is for real, China is going to be at risk of a very hard landing for the duration.

Andy Xie on China's Cash Crunch

Andy Xie echoes the same problems I posted in the past couple of weeks, which threaten a devaluation in China.

When the China tide goes out

The central bank isn’t in a position to inject liquidity to replace all the departing hot money. Because the Federal Reserve is likely to tighten for three years to come, printing money to replace all the hot money that is leaving would put the country’s exchange rate under mounting pressure to devalue, which may trigger a full-blown financial crisis.

Andy Xie doesn't believe a crisis is necessary though:

The bursting of the speculative bubble has had a limited negative impact on the livelihood of the people. China’s position as the factory of the world is solid. The export weakness is due to weakness in global demand, not competition.

As exports are still rising at twice the pace of global trade, China’s economy has a solid cushion from any downturn.

The country is experiencing an acute shortage of manual labor. If the property market contracts, it won’t lead to widespread unemployment.

College graduates are having difficulty finding jobs, but, this is mainly due to the current economic model, which drives growth through construction and factory production. Only changing the growth model can solve China’s problem with insufficient white-collar jobs.

This is the goal of the new leadership, but the big question is whether it is already too late to transition. What happens if growth slows further, or global trade contracts, or if trade barriers start choking off trade?

Indonesia printed money to finance capital flight in 1997 and 1998. The country collapsed afterwards, bringing down the government and the banking system. China must learn from this lesson and control money supply.

In 1998, China refused to print money and devalue. It reformed to deal with the pressure, which gave the country a decade of economic boom. The same could happen now. Just control money supply and reform to handle economic difficulties.

China's problems were much smaller in 1998. Taking bad loans off the balance sheets of banks back then was easy, especially with the economy growing at 10%. Xie goes on to identify what I believe in the main flaw in China's financial system:

Since the yuan is de facto pegged to the dollar, the outflow is greater than what Brazil or India faces, as hot money outflow is not discouraged by a lower exchange rate.

The yuan can resist devaluation for a long time, until it cannot. China can experience greater volatility and appear more stable, but if volatility reaches an extreme, it is China that will experience a cataclysmic event because the rigid systems that maintain stability today will break, just as Thailand's peg broke in 1997.

Another factor working to devalue the yuan is the run-up in money supply:

Further, the rampant monetary growth is losing impact on the real gross domestic product growth rate. M2 rose by 6.1 trillion yuan and the net increase in all sources of financing rose by 6.2 trillion yuan in the first quarter of 2013. But the nominal GDP increased by only 1.1 trillion yuan from the year before.

And then we come to the crux of the crisis, why I suggested that the Chinese Yuan Could Devalue 50% Or More:

If China insists on pumping liquidity to replace the outflow of hot money, it encourages capital outflow by holding up asset prices artificially high. As its money supply is five times the country’s foreign exchange reserve and the annual growth in money supply alone is two-thirds of forex reserves, replacing capital flight by printing money can go disastrous quickly.

In 1997-98, Indonesia did just that. It even borrowed lots of money from the International Monetary Fund to finance capital flight. When the U.S. dollar reserves dried up, the currency and the financial system collapsed.

When a country faces what China faces now, it can either raise interest rates or devalue the currency. Avoiding both just creates a bigger disaster.

I believe a devaluation is inevitable because I do not see deflation being contained, financially or psychologically. There will be a major decline in social mood that will lead to a crisis of confidence. Whether justified or not, the entire globe will question the Chinese model of growth, just as the world questioned American capitalism in the wake of 2008.

Longer term, I'm optimistic like Xie, but I believe his economic arguments lack the psychological impact of slower growth. For instance, he says lower property prices will only hurt the speculators and corrupt officials holding millions of empty apartments. This is like saying subprime will be contained to California or other markets. When a system swings into reverse, the impact reverberates across the entire economy. All of Chinese business will lose confidence if the market, which has moved for so long in one direction, suddenly starts moving the opposite way.

Andy Xie: China has 20 million empty apartments

Google translation of an Andy Xie interview: Andy Xie: China now has 20 million sets of the empty house (谢国忠：中国现在有2千万套空房子)

21CBR : Recently you called "Do not buy a house, free house quickly sell". Well, you sell a no ?

　　Andy Xie: I no vacant room, I only live a house. My opinion, for investment purposes, the best way to protect themselves is to sell the first hands empty houses. I have estimated that China now has 2 million sets of the empty house. Empty house did not produce income, you are holding what ? Could also add value ?

　　21CBR warmer months the property market : Why is the illusion ?

　　Andy Xie: Although the property market bubble began to burst, or there will be a rebound, the market adjustment are the waves. In this process, the decline of the property market trajectory very similar to the A shares continued to fall . In my opinion, this decline is at least three years, and now is the beginning of the first year.


　　21CBR : media reported that eight years each sing empty property market, but are often frustrated - eight years, house prices are still in the twists and turns rose. How do you think of this argument ?


　　Andy Xie: I said the property market bubble, but did not say immediately ringing off the hook. The foam does not mean that will be ringing off the hook. Even in the presence of foam, sometimes also rose.

　　21CBR : You said that the Chinese economy is in a linear downward trend, which are attributed to the weak real estate ?

　　Andy Xie: I think a large part is. To adjust the foam after the macroeconomic slowdown is inevitable, this is a simple truth. This time can not be immediately panacea, continue unless the foam blowing.

　　21CBR : Do you think how to solve the problems of the property market it ?

　　Andy Xie: I think the most important thing now is to see the problems of the real economy, the past five years had failed to resolve. If we still want better place, hope to get better or the government what is the trick, this naive. People want to protect themselves, and sell the empty house. Spanish original real estate is also very popular, and that 20% of the house is empty after the bubble burst . The future, looking back today will be the same.

　　21CBR : It looks like China has cut into the channel, and how much to cut interest rates to stimulate macroeconomic ?

　　Andy Xie: America's bubble burst quickly to cut interest rates, the the European bubble burst quickly to cut interest rates, which are not used. In addition, the European rate cut pressure on the euro, also appeared devaluation pressure. If China or using foreign exchange reserves to support, continue to put money in, will only increase the pressure for devaluation.

　　21CBR : for you previously forecast pessimistic about the Australian economy, Australian Treasurer, Wayne Swan, (Wayne Swan) countered that Australia's economic growth is expected in the next two years will be more than any other developed country. How do you see ?

　　Andy Xie: I think he's thinking is: the low price of Australian iron ore sales volume is large enough, you can withstand the risk of decline in iron ore prices. But in my opinion, the Australian economy over the past few years is very dependent on external capital, these investments are very large impact on the Australian economy, investment in mineral foam. Mineral investment is growing increasingly difficult to finance the construction of the mine. Once the funds have broken the very large economic impact on Australia. I think this is the key, not only is the problem of mineral exports.

　　21CBR : how to avoid the risk of currency devaluation ?

　　Andy Xie: first and foremost thing is the exchange rate liberalization, and let it float to ensure that China's foreign exchange reserves will not drag into economic decline, which is China's economic self-protection is very important thing. Or of the fight with the market, the foreign exchange reserves are smashed into China's economic future risk.

　　21CBR : Do you think the effect of tax cuts now ?

　　Andy Xie: I think the real effect is very small, even if the tax cuts many projects, but the amount is still small. This is why I had proposed to tax cuts must be quantitative, quantitative in order to guarantee results.

　　21CBR : you are not optimistic about the overall prospects of VC / PE ?

　　Andy Xie: There are several one thousand investment banking, private equity, and each year add up to thousands of items put into a project, but China's stock market listing of each year up to hundreds of projects, and how to cash it ? bubble finally to break.

Capital fleeing China; China must float the yuan and slash taxes

China is bleeding capital along with other emerging markets and a crisis is on the way for countries with fixed exchange rate regimes. As I've argued before, one of the features of a currency peg is that it must be defended and any sign of weakness can invite losses as people lose faith in the currency.

Here is Andy Xie in Keeping the Economy Afloat

There are similarities between China today and Southeast Asia fifteen years ago. China could learn from the latter's experience and control the financial risk in today's uncertain environment.

Between 1992 and 1996 the low U.S. interest rate prompted a massive amount of hot money to flow into Southeast Asia. The money was mainly lent to the region's banks, which lent the money out for investment in commodity industries and property speculation. The tide reversed in 1997. It triggered massive devaluation and economic contraction.

When faced with capital outflow pressure, Southeast Asian countries used their forex reserves to defend the exchange rates. Like China today, they had controlled exchange rates. They had plenty of forex reserves when the outflow pressure began. But, after defending the exchange rates for an extended period of time, they couldn't back down from the policy until depletion of the forex reserves forced them to devalue. Some countries even borrowed considerable amounts from the International Monetary Fund to continue the wrong policy. All they achieved was subsidizing capital flight.

That is what the PBOC has been doing for much of the past 9 months: entering the market to halt the slide in the renminbi. The offshore renminbi rate is higher than the mainland rate, opening a small profit window for arbitrage, but also signaling that there's heavy selling of renminbi.

Why might they be doing it?

Without forex reserves, these countries couldn't support their financial systems. The financial collapse brought massive economic contraction and widespread suffering. If these countries had floated their currencies at the first sign of outflow pressure, they wouldn't have suffered as much.

The irrational, costly and sustained defense of fixed exchange rates had much to do with who was taking money out. It was the ruling elite taking their gray income out. This political force may partly explain why these countries were so resolute in defending their exchange rates.

I don't think this is as good an explanation for China, where there are strong political reasons to defend the exchange. Domestically, China wants to be seen as a strong economy with a rising currency. Internationally, it is worried about upsetting trade partners, specifically the EU and the United States.

Float the Yuan Now
China's forex reserves are massive in absolute amount. But they cannot really be all deployed. If the forex reserves fall by one-fifth, it may trigger panic. China's monetary assets are many times the forex reserves. A panic could exhaust the reserves quickly. Even if the government institutes tougher capital control to slow the outflow, as what occurred in 1998, the resulting confidence collapse could do considerable damage to the banking system.

Bingo. China cannot go back on the internationalization and reform of the renminbi. It halted the appreciation during the 2008 crisis, but if they reverse course now, it will be seen as a China-specific problem that causes international, but most importantly, domestic speculators to flee the currency and banking system.

How bad is the economic bubble? Andy lays out how it will come apart:

China experiences overcapacity in most industries. Rising costs have further weakened businesses' ability to earn profits. The economy has been disproportionately dependent on land appreciation as the source of profit. From banks to loan sharks, the financial sector is highly dependent on land appreciation for sustaining lending margins. Commodity industries have been subsidized by commodity traders who earn profits from loan-sharking to property developers. Equipment suppliers depend on local governments' ability to pay. That depends on land sales. Of course, this model of sustaining profitability is a bubble. As the bubble bursts, profitability will be squeezed all around. Sustaining investment through increasing other sources of financing won't change this story.

When businesses see shrinking profitability, they are likely to shrink businesses. If there is no hope for any profitability, they may liquidate and, in many cases, emigrate. In addition to declining profitability, businesses also feel the squeeze from local governments that try to increase revenues elsewhere after losing most land sales. That squeeze is frightening. It has the potential to squeeze out all the past profits of the existing businesses. So for many closing down and leaving is the best option.

Get ready for more stories of fleeing businessmen who shut down their companies overnight.

Andy Xie closes with this advice:

If China wants to incentivize businesses and households to keep money at home, the government should cut taxes substantially and shrink the state sector with numerical targets and timetable. Otherwise, capital outflow is likely to continue.

Luckily for China, that is exactly the plan of Xi Jinping, Li Keqiang, and Wang Yang (see: Liberals aim to unleash new wave of reform). Now we will see who is really in charge: can the rising leadership push through reform or will China go through another costly 2008-style stimulus that benefits the state industries controlled by CCP insiders?

Also see: Chinese hoard dollars; China's dollar short position; China's foreign currency loan-to-deposit ratio sinks again; China's 3000 wealthiest households lost nearly $100 billion

Andy Xie says Chinese home prices could quickly fall 25%

He says the housing bubble is blocking economic reform because disposable income is going into housing. A decline in home prices will lead to faster rebalancing as assets come out of the real estate sector and flow into the economy. He says the government shouldn't fear a drop in revenue and a decline in infrastructure development.

My take: China's government leaders need to trust in the free market and let their economy stand on its own. Propping it up with government directed investment and a real estate bubble is a recipe for stagnation. Let the people spend and invest.
中国房价可能很快会跌25% 财富转向居民

Andy Xie says yuan is overvalued

In an article about China's problems with the real estate sector, Andy Xie says an undervalued currency is not one of China's problems. In fact, the renminbi may be overvalued.

泡沫破后中国部分房价会跌去九成

中国有很多问题。但低估汇率不是问题。我反而认为人民币可能被高估了。存在升值压力是因为市场猜测美国可能会对中国采取何种措施。近十年内，中国的货币供应量增加了4.5倍。在经过长时间和大规模的货币扩张之后，从来没有任何经济体的货币会不贬值。如果人民币升值预期逆转，资本会巨额外流。这才是对中国的考验，而不是今天的升值压力。

China has many problems, but an undervalued exchange rate isn’t one of them: The renminbi may even be overvalued. The pressure to appreciate comes from market speculation about what the U.S. may do to China. China’s money supply has increased four and half times in a decade. I don’t recall any economy that, after such prolonged and massive monetary expansion, didn’t suffer devaluation. When we see a reverse in the expectation that the renminbi will appreciate, the capital outflow could be massive. That will be China’s true test — not today’s pressure to appreciate.

English link.

The English link translates some of the Chinese, but it is mostly about currency, where as the Chinese article is about globalization and a real estate bubble. Here Andy Xie has the trend right, but since he's not looking at social mood, his timing may be a bit optimistic. Below is the sloppy Google translation along with the Chinese:

While the trade war is unlikely now, the next few years, Sino-US trade frictions may increase. A commodity-specific protective measures will proliferate. Chinese enterprises will become increasingly difficult for independent development in the United States sell their products. In essence, the Sino-US trade will become increasingly concentrated in the United States multinationals. Obviously, this is not good news for Chinese companies because these companies eager to establish their own brand, or establish their own distribution channels in the United States. China might react to restrict U.S. multinationals in China business. Although the bilateral trade will continue to develop, but growth will slow sharply. I suspect that in the next decade, the pace of development of bilateral trade may be less than half of the past.

　　Sino-US trade friction signs that global trade will slow down. This may be a good thing. Over the past 20 years, as multinational companies will shift production to developing countries, global trade growth rate is the world's economic growth rate of 2 times. Most of the production have been completed to transfer the transfer. The remaining production is difficult due to the transfer of political interference. Future global trade in goods may be synchronized with the global economic growth.

　　For a long time, globalization has both the developed and developing countries is a win-win. But we have no such feeling. Developed over the years to enjoy cheap goods, since the unemployment, the income of the developed countries face the problem of suffering. Developed countries, the future looks worse.

虽然眼下不太可能出现贸易战，未来几年，中美贸易摩擦可能加剧。专门针对某种商品的保护措施会激增。中国企业会越来越难以在美国销售它们自主开发的产品。从本质上讲，中美贸易会越来越集中在美国跨国公司中。显然，这对中国公司来说不是好消息，因为这些公司渴望树立自己的品牌，或者建立它们自己在美国的分销渠道。中国可能会作出反应，限制美国跨国公司在中国的业务。虽然两国贸易将继续发展，但是，增长率将大幅度减缓。我怀疑，在未来十年内，双边贸易发展的速度可能还不及过去的一半。

　　中美贸易摩擦的迹象表明，全球贸易将会放缓。这可能是好事。过去20年来，由于跨国公司将生产转移到发展中国家，全球贸易增长速度是全球经济增长速度的2倍。大部分可以转移的生产都已完成转移。其余的生产由于受政治干扰而难以转移。未来全球货物贸易可能与全球经济同步增长。

　　长期以来，全球化无论对发达国家，还是发展中国家都是共赢的。但现在已经没有这种感觉了。发达国家多年来享受廉价商品，现在由于失业，发达国家面临痛苦的收入问题。发达国家的未来看起来更糟。

With regards to real estate, Xie sees a collapse in real estate prices, by as much as 70-90%. China will have to raise interest rates soon, he says, but if property prices decline, the hot money will flow out of the property sector. Although Xie doesn't represent the thinking of the Chinese government and regulators (though there are some similarities), he does offer a China-centric view of the Chinese economy. The U.S. press, including Nobel Prize winning economist Paul Krugman, tend to look at China as if it was just a manufacturing hub.

Also interesting is how all this plays into the views of Liu Jun Luo and Song Hongbing, of the U.S. using its currency (along with other tools) to retain its position as the number one economy. Liu has predicted that the renminbi could collapse, along with all the other currencies of the world, to as low as 20 to $1.

Andy Xie on Empty Apartments in China

Fear Empty Flats in China's Property Bubble

One useful figure for analysts is China's living space per capita. Surveys in most cities suggest the average living space is between 28 and 30 square meters per person. We don't know which population segment these surveys cover; they certainly don't include migrant workers. And we don't know if empty flats are counted.

Based on this limited data, however, we can confidently conclude that China does not have a housing shortage. Moreover, its per-capita living space is higher than in Europe and Japan. Indeed, if we adopt Japan's standard, China already has sufficient urban housing space for every man, woman and child in the country.

Far more important than general data, however, are the housing figures pointing to a huge quantity of empty flats apparently being held only for speculation. In a normal market, the vacancy rate should be equal to the number of households relocating, times the average transition period, plus newly formed households times the average purchase period. For example, a vacancy rate of 1.5 percent could accommodate a market in which 6 percent of households relocate every year, and the transit time is three months. If new household formation is 3 percent and the average period for a property purchase is six months, this factor requires a vacancy rate of another 1.5 percent. The total normal vacancy rate should be 3 percent. This figure includes the new properties ready for sale.

Although the government doesn't publish vacancy data, I think the vacancy rate for the nation's private, commercial housing stock is between 25 and 30 percent. That's at least double what's required in a normal market. The gap between what's needed and what's available can be viewed as speculative inventory. The value of this inventory held by speculators is probably around 15 percent of GDP. It's being kept on ice just as copper and other commodities are hoarded in anticipation of rising prices.

中国天量空房是数量泡沫危机来临的讯号

获得城市住房总量的可靠数字实在很难。人均住房面积数据还比较有用。在大部分城市开展的调查显示，平均住房面积为每人28平方米-30平方米。我们不知道这项调查覆盖了多少人口，但是，这些数据肯定不包括农民工。我们不知道这项调查是否将空置房计算在内。我粗略估计了一下，中国城市住房总量约为170亿平方米，误差区间为上下各10％。

　　尽管数据不精确，但我们仍可断定，中国不存在绝对住房短缺的情况。如果采用日本的标准，中国城市住房足以安置所有的中国人，所有农村人口迁到城市都足够。

　　掌握投机型（而非其他目的）空房的数量，比掌握住房总体数据重要得多。虽然政府未能公布空房数据，但我认为商品房空房率为25％-30％，比正常市场情况下至少高出100％。这种差异可被视为投机库存，如同有人囤积黄铜，待价而沽。这种投机库存的价值可能占GDP的15％左右。

　　更可怕的是，2010年-2011年将可能形成大量投机库存。近期信贷收紧，挤压第二套及第三套房购房者，导致全国交易量崩盘。我从房产中介发现，大多数房产需求被纳入调控范围，即投机购房。可以假设，2010年-2011年，房产供给将接近GDP总量的15％。房产政策调控抑制市场过热，开发商势必囤积供给，作为库存。一旦再次放宽调控，投机行为将卷土重来，可能导致投机库存价值翻番。

谢国忠: 名酒怪象

Andy Xie's latest article discusses Chinese consumer behavior. Sales of luxury brands are doing very well in Asia and he says many shops in Europe have Mandarin speaking staff. He talks about the current Chinese luxury consumer's attention to marketing over quality (in a later bit on French wine sales), while noticing a healthy appetite for luxury goods:

另一方面，中国游客组团出游。他们住小酒店，吃方便面，却在路易威登（LV）皮包上一掷千金。中国人花钱买的是耐用消费品，而美国人花钱都吃到肚子里了。两国游客消费行为的本质区别，不会随人民币升值而改变。如果人民币升值，肯定有利于LV的销售，但是，这对美国的出口毫无帮助。

He says the Chinese in Paris will stay in cheap hotels and eat instant noodles, but will buy Louis Vitton handbags. The Americans prefer to spend money on food. And the change in the value of the renminbi will not change this. It's good news for Louis Vitton exports, but not for American exports. Full article in Chinese here: 名酒怪象. An English translation should be out in a few days.

China tax reform

Interesting editorial in Caing yesterday: Tax Relief Time for Strained Manufacturers
The editorial argues that China needs tax reform because corporate taxes are now as high or higher than some developed nations.

Besides taxes, all kinds of fees add burden to Chinese companies. Through the decade ending in 2008, the percentage of government income from all sources including taxes and fees rose to 32.2 percent of national income from about 20 percent. As a result, this ratio in China now exceeds what's found in many other countries including the United States, South Korea and Switzerland. And it comes close to the 36.6 percent average for all OECD countries.

A World Bank report said tax rates in low-income countries where per capita GDP is around US$ 750 should be about 20 percent. In countries with a per capita GDP of US$ 2,000, it said, tax rates should be around 23 percent. And in countries with a per capita GDP of US$ 10,000, tax rates can be 30 percent.

China's per capita GDP in 2008 was more than US$ 3,000, but government income levels exceeded those of developed countries. Clearly, the tax level is beyond China's development stage and adjustments are needed.

In order to help China maintain economic development and social stability, value-added tax, corporate income and operational taxes should be lowered first.

What piqued my interest was this paragraph:

Vice Premier Li Keqiang recently wrote an article for the Qiu Shi Journal, a publication of the Central Committee of the Communist Party, that made the case for "positive and steady strides in tax system reform" as well as "reducing (government) fees and balancing the tax burden." There are also discussions within National People's Congress Financial and Economic Affairs Committee to "lower the (tax) burden and raise wages."

Li Keqiang (李克强) is regarded as a potential successor to Premier Wen Jiabao in 2013. If he's spearheading a push for tax reform, it's likely going to come to pass. First up is a resource tax:

On June 1, China unveiled its first resource tax, to be imposed at a rate of 5 per cent on fossil fuels in Xinjiang, as a means of retaining some of the region's mineral wealth in local hands.

Since then Vice-Premier Li Keqiang has advocated a national resources tax in a speech published in Seeking Truth, the Communist Party's leading theory magazine.

And then there's the property tax:

The simmering scandal behind China's rapid development has been the treatment of the 100m-150m migrant workers. Deprived of the right to become permanent residents in the cities, they are often denied access to subsidised schools and other social benefits. Chinese reformers bemoan the fate of "second-class citizens" and talk of "apartheid". Li Keqiang, forecast to be China's next premier, said this month that reforming the system was a priority.

However, attempts at reform have always been stalled by the fragile finances of the local governments that would have to provide these benefits. Those finances have got weaker in the past year as cities and provinces have borrowed to fund spending on infrastructure.

Indeed, if China's post-crisis boom has an Achilles heel, it is the hidden levels of local government debt. A property tax would eventually help provide local governments with the resources to begin paying migrant workers their due.

The spill-over effects do not end there. With more stable income sources, local governments would not need to be so aggressive about selling land to developers, one of their main sources of revenue and the cause of endless social tension as residents or farmers are displaced. Such a tax would also increase the pressure on local governments to be more transparent in their spending. As Li Daokui, an adviser to the Chinese central bank, put it , local governments would have to "report back to the homeowners how they have used this money. In other words, the tax can be used as an instrument to improve local government management."

And then there's rising minimum wages:

The Chinese government is deliberating to re-divide the cake of national wealth among businesses, workers and its own revenues with a move to raise salaries and cut taxes, as a round of minimum-wage hikes kicks off this year.

The Beijing Bureau of Human Resources and Social Security announced Thursday that, from July 1, the city's minimum wage will rise by 160 yuan ($23.50), or 20 percent, from the current 800 yuan ($117.30) per month.

The capital city has set a minimum wage since 1994, and the average annual increase rate is 10.02 percent, according to the bureau, which estimates 100,000 people in the capital will benefit from the increase.

Beijing is one of about 30 provinces or municipalities that have raised or will raise their minimum wage this year, according to figures released by the Ministry of Human Resources and Social Security.

After recent raises, Shanghai currently has the highest minimum wage across the country - 1,120 yuan per month ($164.20) - and Guangdong Province claims the crown for the highest minimum wage per hour, which stands at 9.9 yuan ($1.44).

...Vice Premier Li Keqiang noted in an article published Tuesday by Qiushi magazine that the government will try to increase the proportion of the middle-income group and create an "olive type" wealth distribution system.

After looking at the original Chinese, the word for olive turns out to be the same word for an American football, which obviously has a middle bulge. In addition to tax reforms, a large middle class will grow out of rising wages in China and Andy Xie's latest article is hitting on the theme again.

今后十年大幅上涨的是工资，而不是利率 He says wages, not interest rates, will rise greatly in the next ten years. An English version may or may not become available, here's a link to the Google translated version. He also says inflation could reach double digits, the rise in wages could eventually lead to yuan depreciation, and he's sticking to his target date of 2012 for a potential real estate bubble burst and economic hard landing.

谢国忠：低利率致每年向储户征税1.4万亿

低利率致每年向储户征税1.4万亿

经济学家谢国忠接受《华夏时报》记者采访时表示：“我不知道他们的数据是从哪来的，实际上恶性通货膨胀早已发生。”

　　谢国忠认为，抑制通胀最有效的手段是加息，至少要加5个百分点，但实际上央行远远不会加那么多，央行受制于各方利益博弈。谢国忠称，3月末金融机构住户存款余额为28.5万亿元，低利率等于向储户家庭征收了1.4万亿的税（28.5万亿乘以5％的应加利息计算得出）。

　　由于银行信贷大部分投向了房地产、国企以及地方政府，低利率只会对这些拿到贷款的部门有利，这些势力显然比央行强大。央行加息必然会触动其利益。央行在一季度货币政策执行报告中，提到货币数量控制时，只字未提货币价格调控——即加息。

　　谢国忠认为，以前对这些势力的补贴主要靠低工资和低资源价格，现在，资源价格高了，用工荒之后，工资也在上涨。

通货膨胀的时候，如果利率比通货膨胀少，通货膨胀会增长。我记得几年前我跟中国学生吵架。我说了如果中国继续了货币挂钩,最后是通货膨胀。 人民币升值预防通货膨胀，因为美国中央银行创造很多通货膨胀。货币挂钩是个从美国到中国的通货膨胀管道。

Andy Xie on the housing bubble

Animal Instinct on China's Real Estate Range

At the root of the property bubble are negative real interest rates. China's bank deposit rates are extremely low: 0.36 percent for demand deposits and 2.25 percent for one-year deposits. These rates are set against a backdrop of rising inflation fueled by a tight labor market and skyrocketing prices for government-owned land.

There are occasional fads and manias and herd behavior, but every single great financial bubble was supported by credit.

This will be the first year in a long while that household debt rises more quickly than household deposits. In other words, China's household sector will reduce rather than increase its liquidity in banks. That makes the banking system more dependent on hot money for liquidity and the system vulnerable to shock.
This is exactly what happened in Hong Kong, South Korea and Southeast Asia a decade ago. Their banks were quite dependent on hot money to support lending growth. When the shock came and foreign liquidity was pulled, most banks collapsed. Hong Kong's banks remained afloat due to strong capital bases. Still, interest rates had to be raised forcefully to maintain liquid positions. These high interest rates, in turn, popped Hong Kong's property bubble.

China's household debt level is getting close to the danger level. Even if the growth trend moderates, debt is likely to surpass 15 trillion yuan in 2011, equivalent to about 100 percent of urban labor income. More importantly, China's household debt is a new phenomenon. For it to rise so fast to such heights rings alarm bells. Experiences from other countries show that whenever household debt rises at such a rapid pace and to such high levels, delinquency rates are likely to go up – a lot.

Andy offers some solid long-term solutions to housing and he's sticking to his 2012 target of the global bubble bursting.

Andy Xie: Raise Rates, then the Yuan

Get the Yuan Right, Prove Pundits Wrong

But acting on the currency first, especially in small steps, would further inflate China's property bubble and inflation, potentially leading to a major economic crisis in two years. A small increase in the yuan's value would fail to resolve two pressing problems: inflationary pressure at home, and political pressure from the United States. Moreover, a small appreciation would attract hot money, stoking inflationary pressure.

Imported goods' share of consumption is too small in China for a small currency appreciation to affect the consumer price index. At the same time, a minor appreciation would fail to placate U.S. interest groups, some of whom are demanding a rise in yuan value of one-third or more. Some argue it should double in value.

Indeed, a slight appreciation would merely exacerbate existing problems by emboldening U.S. supporters of a stronger yuan to demand even greater appreciation.
Meanwhile, financial markets are back on the yuan appreciation watch. Inflation pressure at home and political pressure from the United States have inflamed expectations. Every week or two, the media reports that some notable person has predicted an imminent yuan appreciation of 5 percent or so. So much ink has been spilled on this issue that the consensus on yuan appreciation has become the longest lasting and most widely accepted consensus in financial history. It's lasted for so long because financial markets have few stories to stir fry, and an appreciation of a pegged currency is a free lunch. Nothing gets financial markets more excited than a free lunch.

Andy Xie: Frayed String for China's Property Balloon

Andy Xie talks about China's property market in his latest, Frayed String for China's Property Balloon:

Beijing's economic policies have been favorable to people in the low-income bracket over the past few years through rural subsidies, agricultural land reform and price controls for necessities. The resettlement policy is another element designed to help them. But the middle class is paying the price while their most important expenditures – property, cars and education – are highly inflated. Indeed, China's property and car prices are among the highest in the world in absolute terms, and by far the highest relative to income. Unless policies change dramatically, the middle class squeeze will get worse.

China's property market is a massive bubble. The stock of residential properties, developer inventories and land pledged to banks by local governments exceed by three times the nation's gross domestic product. Rental yields in most cities fail to cover depreciation costs. The price-to-income ratio, a measure of housing affordability, is routinely above 20 in major cities, which means an average Chinese citizen would spend his or her entire income for 20 years to buy an average-priced property.

The bubble can continue because China's banking system has plenty of liquidity, partly thanks to hot money and because governments have many levers to channel bank liquidity into the market. But the longer the bubble lasts, the more damage it will do to the economy.

Read the whole thing.

谢国忠：2012泡沫破裂 目前维持区间波动

Here's an Andy Xie interview in Chinese. It contains a great comment on the Chinese real estate market worth considering: the market is at a stage where "the flour costs more than the bread" and real estate companies are relying on the stock market, not the property market.

2012泡沫破裂 目前维持区间波动

近期央行的一系列动作，被市场解读为“紧缩”货币政策的信号。而独立经济学家、玫瑰石顾问公司董事谢国忠则认为，这主要是在打心理战，还没有动真格的。但目前即使拿起“真刀真枪”，幅度也不会很大。

　　谢国忠认为，中国近几年名义GDP为4.5%，而短线的利息水平为零，这在历史上从来没有出现过，所以不出现大泡沫是不太可能的。因为利息的增长应该与GDP的增长紧密相连，比如韩国经济增长达双位数的时候，利息的增长水平也是双位数。他预计泡沫会在2012年最终破裂，发生二次经济危机之后，可能才是真正的见底。

　　那么，如何看待当前的经济状况？这种状况又将如何影响股市？《每日经济新闻》日前对谢国忠进行了专访。

　　货币微调是“心理战”

　　《每日经济新闻》(以下简称NBD)：通胀预期已经成为共识，监管层也已在货币政策层面进行了微调，那为什么2012年通胀仍会成为大的隐患？

　　谢国忠：一般情况下货币投放和通胀到来两者之间有一个时间差，货币的大量投放会催生资产价格的上涨，价格的上涨到实际通胀的形成一般情况下会经历2年的时间。目前我国已经出现了通胀的迹象，且预期较高。

　　更值得注意的是，全世界通货膨胀会在同一时间内到来，美国从2008年开始增加货币供应量，2009年继续，近期在美国也看到了通胀。但是通胀由低到高需要一个过程，即使通胀水平到了政府不能忍受的阶段后，到破裂也还有一段路要走。

　　NDB：但政府已经意识到了通胀的问题，近期上调存款准备金率等措施就被市场解读为收缩流动性的信号。通货膨胀还会成为隐患吗？

　　谢国忠：这主要是心理作用，其效果可能有限。因为目前银行的贷存比是67%，说明银行业是不缺钱的。如果要真正控制信贷投放，一个途径是加息，另外一个途径是提高资本充足率。

　　NBD：调高存款准备金率等措施能不能说是货币政策转向呢？

　　谢国忠：目前来看，政策核心还是以吓唬一下为主，尚未拿起真刀真枪来。相比正常水平，尽管中国的利息水平低三个百分点，但是监管层不愿意加息，所以通过打心理战来进行管理。即使拿起了真刀真枪，加息的幅度也不会太大。

　　二次危机可能到来

　　NBD：2012年泡沫会破裂？

　　谢国忠：全球经济一体化，主要看美国加息，只有美国加息后，全球的经济环境才会改变。不少人认为美国不会出现通胀，但金融危机下全球都在增加放贷，进行炒作，目前主要的泡沫来自于新兴市场金融、大宗商品以及房地产市场。

　　特别房地产是一种非生产性的资产，房产价格的高低反映了经济走势的好坏，而现在是把因果关系进行了倒置，认为经济形势好百姓就有钱买房。

　　NBD：那也就是说泡沫破裂之后会陷入第二次危机？

　　谢国忠：这次金融危机是因为美国华尔街出现问题，政府反过来救他们，释放信贷，依靠泡沫来维持经济复苏，如此增长不能长久。但是当第二次危机来临时，政府已不能继续实施财政刺激计划，于是经济见底。

　　NBD：您为什么认为经济会出现二次探底？

　　谢国忠：现在经济的增速已经开始放缓了。原来得益于基数比较低和存货周期所带来的出口上升，得益于4万亿投资中不少项目提前进行，得益于信贷的大量放贷，房地产市场增幅巨大，资金在流到开发商口袋后又重新进入新的开发项目，在一系列的一次性因素作用下，我国经济出现了快速的恢复和增长。

　　但是今年，看不出经济高速增长的延续性了。从全球范围看，世界经济复苏的高点应该在去年四季度。

　　金融危机后，经济运行态势反映出的是通过泡沫来维持经济的增长，在经济结构上出现了歪曲，在结构没有进行调整之前，经济不太可能出现快速复苏。

　　3000点是心理关

　　NBD：在这种环境下，股市会如何运行呢？

　　谢国忠：过去市场形成了一个大泡沫，在此情况下不断释放的流动性则暗示着可以继续去炒作，这是投资者的一个梦。

　　中国的股市和信贷投放是水涨船高的关系。如果没有充足地放贷，股市便无法大涨。从去年开始银行已经在货币政策上进行微调，但是还没有真正开始收紧流动性。

　　从监管角度分析，政府有一个矛盾心态，即当股指涨起来时不希望继续大涨，但又不敢任其大幅下跌，造成负面后果。用一个比喻，管理层把投资者当作是小孩子，注重心理层面的影响。当股市下跌的时候，便掏出糖果“哄”，而当认为上涨过猛时，又拿出“大棒”来吓唬，所以目前处于胶着的状态，描绘出的是一副区间波动的走势图。

　　NBD：股市岂不是波动会很剧烈？

　　谢国忠：就是通过上下波动让投资者留在股市中，3000点附近在监管层眼中应是一个较为敏感的关口，这是政府的一个心理价位。但当通胀来临需要收缩流动性，开始加息时，投资者的梦就会破灭。

　　NBD：那么我国实体经济能否支撑股市走好？

　　谢国忠：除去垄断行业公司盈利状况不错之外，其他企业尚无法看得清晰。比如房地产行业，目前处于“面粉价格高于面包价格”的阶段，其拿地成本居高不下，许多房地产公司并不是靠房产销售来赚钱，而是依赖配置股票。

Sing it Andy Xie

Central Banks, Arsonists and Playing with Fire

Every party ends sooner or later, and I see two scenarios for the next bust. First, every trader is borrowing dollars to buy something else. Most traders on Wall Street are Americans, British or Australians. They know the United States well. The Fed is keeping interest rates at zero, and the U.S. government is supporting a weak dollar to boost U.S. exports. You don't need to be a genius to know that the U.S. government is helping you borrow dollars for speculating in something else.

But these traders don't know much about other countries, particularly emerging economies. They go there once or twice a year, chaperoned by U.S. investment banks eager to sell something. They want to think everything other than the U.S. dollar will appreciate; Wall Street banks tell them so. Since there are so many of these traders, their predictions are self-fulfilling in the short-term. For example, since the Australian dollar has appreciated by 35 percent from the bottom, they now feel very smart while sitting on massive paper profits.


When a trade like this one becomes too crowded, a small shock is enough to trigger a hurricane. There must be massive leverage in many positions, but one just never knows where. When something happens, all these traders will run like mad for the exit, and that could lead to another crisis.

Surging oil prices could be another party crasher. This could trigger a surge in inflation expectation and crash the bond market. The resulting high bond yields might force central banks to raise interest rates to cool inflation fear. Another major downturn in asset prices would reignite fear over the balance sheets of major global financial institutions, resulting in more chaos.

Twice in recent years, oil prices surged into triple-digit territory, wreaking havoc on financial markets and the global economy. In 2006, surging oil prices toppled the U.S. property market, debunking the story that property prices never fall -- a premise upon which subprime lending was based. Oil prices fell sharply amid the subprime crisis period while the market feared collapse in demand. The Fed came to the rescue and, in summer 2007, began cutting interest rates aggressively in the name of combating the recessionary impact of the subprime crisis. Oil prices surged afterward on optimism that the Fed would rescue the economy and oil demand. It worked to offset the Fed's stimulus, accelerated the economic decline, and pulled the rug out from under the derivatives bubble. The ensuing fear of falling demand again caused oil prices to collapse.

Oil is a perfect ingredient for a bubble: Oil supplies cannot respond to a price surge quickly. It takes a long time to expand production capacity, and oil demand cannot decrease quickly due to lifestyle stickiness and production modes. Low-price sensitivities on both demand and supply sides make it an ideal product for bubble-making. When liquidity is cheap and easily obtained, oil speculators can pop up anywhere.

Oil speculators are no longer restricted to secretive hedge funds. Average Joes can buy exchange traded funds (ETFs) that let them own oil or anything else. Why not? Central banks have made clear their intentions to keep money supplies as high as possible, debasing the value of paper money to help debtors. It seems no good deed is unpunished in this world. If you speculate big, governments will offer a bailout when your bets go wrong and cut interest rates and guarantee your debts, allowing bigger bets. People who live within their means and save some for a rainy day see dreams shattered. Central banks can't wait to break their nest eggs.

It is better to be a speculator in this world. The powers that be are with you. Maybe everyone should be a hedge fund; ETFs give you this opportunity. As the masses are incentivized to avoid paper money while buying hard assets, the price of oil could surge to triple-digit territory again. Oil bubbles are easy to come and quick to go because the oxygen needed for its existence disappears after it kills other bubbles.

The boom-bust cycle, in a nut shell.

A word of caution for all would-be speculators: You'll want to run for your life as soon as the bond market takes a big fall. And the case for a double dip in 2010 is already strong. Inventory restocking and fiscal stimuli are behind the current economic recovery, and when these run out of steam next year, the odds are quite low that western consumers will take over. High unemployment rates will keep incomes too weak to support spending. And consumers are unlikely to borrow and spend again.

Many analysts argue that, as long as unemployment rates are high, more stimuli should be applied. As I have argued before, a supply-demand mismatch rather than demand weakness per se is the main reason for high unemployment. More stimuli would only trigger inflation and financial instability.

Stagflation in the 1970s discredited a generation of central bankers. They thought they could trade a bit more inflation for a lot more economic growth. Today's crisis will discredit a generation of central bankers who ignore asset inflation by sometimes trading asset inflation for a bit of economic growth. Those who play with fire often get burned, even when the arsonists don't.

幸运眷顾中国，但真实吗？谢国忠

Andy Xie's latest: Fortune is favouring China, but is it due for a reality check?

The United States had 1929, Japan 1989 and south-east Asia 1997. Will China face a similar moment of reckoning a few years from now?


The question is crucial, not just for those investing in Asia today but for the wider global market. For as investors around the world reel from the recent financial crisis, many have clung to the idea of a Chinese boom as the one bright spot of hope in an otherwise grim world. The trouble is that history suggests that much of this optimism may be misplaced.


Financial markets have a way of working themselves into a frenzy during rapid economic development, which ends up leading to disaster. It is the ultimate testimony to the gross inefficiency of markets. The problem is the unique mix of extreme optimism and rampant liquidity that occurs during periods of rapid economic development.


Economic development, especially in a large country such as China, generates exceptional optimism for many reasons. Nothing brings out the animal spirits in humans like watching the economic pie expanding. And it is natural to buy risk assets such as stocks to express one’s optimism over the future. The problem is that market competition tends to depress capital returns and give the fruits of economic development to workers and consumers rather than investors. High asset prices incentivize companies to over-invest, which depresses returns on capital. This is why investors tend to do poorly during periods of rapid economic growth.


A low income base and favourable demographics help promote successful economic development. Both tend to lead to excess liquidity due to a high savings rate on incremental income growth. When a population is urbanising, even though its productivity is shifting from the agricultural to the industrial level, consumption habits remain rural – that is, anything beyond necessities is viewed as luxury and is minimised. The widening gap between the labour productivity increase and the consumption preference leads to the excess liquidity that feeds bubbles.


China's one-child policy brings the ultimate demographic dividend but probably makes the country the most bubble-prone in modern times. The situation is made worse by the revenue dependency of local governments on the property market. Local government officials, who change every five years or so, have strong incentives to juice up the property market to maximise their revenues. This political incentive sows the seed for a great property bubble.


Similarly, China's stock market will remain overvalued, although it will deflate from time to time during panics and temporary liquidity shortages. The combination of low returns on capital and high share prices means businesses turn to the stock market rather than to their customers for profit.


But when businesses make profits from, rather than for, the stock market, it becomes a negative sum game. It needs continuing liquidity inflows to sustain it. This is why high growth and a high savings rate are vital.


On the other hand, such a market essentially subsidises capital formation. The capital subsidy leads to overcapacity and low returns on capital. This is why poor profitability, high asset prices and high economic growth rates can coexist. Indeed, they must exist together.


China's economic development is undoubtedly going to be the most important economic event for the next decade or two. But the semi-permanent bubble situation makes it extremely difficult for financial investors to participate in this story. “Buy and hold” simply won’t work. Value investing doesn’t work because value investors base their decisions on price/earnings ratios and price/book value ratios falling below certain levels.


Chinese stocks never get there. If you are Warren Buffett, you can create your own bubble. He recently bought a stake in BYD, an aspiring maker of electric cars. The stock has since risen eight times. If you are not Warren Buffett, I suggest “buy low, sell high”. The problem is working out what is high and what is low.


The day of reckoning will come when the high economic growth rate finally falters. This could happen either when the favourable demographic trend worsens or urbanisation ends. When either or both occurs, liquidity or savings do not grow any more. At that point, the stock market cannot be subsidised any more.


China’s final day of reckoning is probably 10 years away.


By that time, half of China’s babyboomers who were born between 1950 and 1978 will have retired. And the Chinese urbanisation rate will be OVER 70%. The good news is that China will be a developed country by then. The bad news is that there will be no cheap money for supporting overvalued asset prices any more.

The takeaway is that investors won't be able to buy and hold, but 10 years is plenty of time to make money.

谢国忠: 美元向好 / 美元中兴

美元向好 / 美元中兴

除了利率，从2011年起，资金也将从新兴经济体流向美国。新兴经济体资产膨胀是靠一股势头得以维持的。一旦这个势头停止，投资者将会认识到， 即使考虑到其增长潜力较高，新兴经济体的资产价格仍要远远高于美国。然后，资本流动将发生逆转，和1996年至1997年发生的情况类似。美元长期疲软曾 将资本逐向新兴经济体，并使其资本市场在很长一段时期内都充满了泡沫。大多数投机者认为，泡沫将一直持续下去，然而，当美元步入牛市，灾难也就来了。很显 然，几乎每一个新兴经济体届时都将陷入危机。如果说另一轮新兴市场危机可能会在2012年出现，我对此毫不惊讶。

The cyclical bull market for the dollar may last for two to three years. It could bounce up by 20%. The dollar index may reach 100 during the period. It would be similar to the dollar’s situation in the early 1980s. The Fed raised interest rate massively to tame inflation. Even though the US economy wasn’t that strong and the fiscal deficit was large and increasing, the dollar rose substantially until the 1985 Plaza Accord. The coming dollar bull market may even be shorter.

货币的价值是相对于其他货币而言的。美国的情况并不是独一无二的。在欧洲和日本，老龄化都是影响经济的主要因素。由于这些国家较高的家庭储蓄足 以支付其巨额财政赤字，因此，其货币相对强劲。然而，未来可能并非如此。日本的财政赤字已经达到其国内生产总值的200％。欧洲国家约为100％。只要这 些赤字还能够用国内储蓄抵补，政府就可以继续增加财政赤字，并通过保持低利率来掩藏过重的财政负担。低利率必须辅之以强势货币。但是，从长期来看，强势货 币将造成经济疲软。因此，未来其收入及储蓄都将相对较低。在未来十年中，欧洲和日本可能需要通过发行货币来撑起赤字，这将导致其货币疲软。

　　老龄化是拖累币值的主要力量。恶性通货膨胀可能会散播到世界各地。由于美元长期前景不妙，这将同时不利于其他货币。在持有货币的时候，我们必须保持警惕。但是，目前不用急于将纸币变为其他形式的资产。在许多国家，股票和资产被严重高估，尤其是中国。对于被高估的资产来说，货币仍然相对便宜。但是，当泡沫破裂的时候，不要忘了将资金转成股票和房地产

v形反弹？謝國忠

新的谢国忠到了。 全都很好但是我想摘抄一下：

这个泡沫的生命很短：

我们现在看到的，是在全球经济中堆积的纯粹的流动性泡沫。它体现在几个资产类别上，最突出的是大宗商品、股票和政府债券。支撑泡沫的理由是，刺 激将导致经济快速复苏，而且，产出缺口能够保持低通货膨胀率，因而中央银行可以把利率数年内维持在较低水平。根据这个描述，投资者可以同时期待强劲的企业 盈利和较低的利率水平，也就是股市所谓的“金发姑娘”（语出Robert Southey的童话，此处“金发姑娘”形容上世纪90年代中后期的美国经济，即一个“稳步增长，通胀温和”、处于童话般的美好状态，但“三只熊”回来， 一切就结束了）。

　　中国二季度和美国三季度发生的事情，似乎可以支持上述观点。我认为，市场被误导了。目前反弹的驱动力量，是库存周期和政府刺激。企业资本支出和 消费的跟进，被结构性挑战严重制约着。这些挑战都源于资源分配不当导致的泡沫。泡沫破裂后，供应和需求之间的不匹配，限制了刺激或泡沫创造需求的效力。

改变储蓄和消费，即社会情绪经济(socionomics)因素模式:

有人认为，如果低利率使房地产市场再度 复苏，美国家庭可能会再次变得愿意借钱消费了。这种情况是可能的，但希望不大。未来，要么会出现经济正常恢复，要么就是由泡沫激发的经济繁荣，结局取决于 美国家庭储蓄率的前景。除非美国家庭部门愿意再次借钱来花，否则，新兴经济体无法重返出口带动增长的模式。

忠告中国，除了分发公有公司的股份（最重要的一个策略之一，因为它可以减少贫富差距）:

其次，中国可以通过结构性改革，大幅降低储蓄率。在中国储蓄总量中，一半来自公共部门。政府和国有企业应该减少其不断升高的留存收益，并增加投 融资的贷款比例。例如，中国较高的资产价格，就是源于地方政府有增加财政收入以支持投资的需要。如果中国的资产价格削减三分之一，国民储蓄率可能会降低2 个－3个百分点。

四季度的预计：

应该用W型代替V型复苏。尽管明年的下滑在统计上可能不深，却将传递出影响深远的心理冲击。金融市场现在很活跃，因为其仍相信政府。第二波下滑将显示政府力量有限。这波下滑或会使资产价格下跌，并保持很长一段时间

我认为他写得很对.去年四季的恐慌很厉害,可是人民有希望.大众以为政府和中央银行很厉害,能控制经济的路径.其实,大众控制经济的路径,是社会从众行为. 而且社会经济有很严肃的不平衡的发展. 总统和央行行长不会做什么,就是让资产价格下降很快和经济调整.

社会情绪经济