Andy Xie Says Hong Kong in Recession

Hong Kong is in a recession, says China expert Andy Xie

Xie believes that plunging retail sales and declining real estate transactions are indications that Hong Kong is in the middle of a recession.

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.

Slower Growth and Andy Xie on Bailouts

Who Should Pay for Trusts that Go Bust?

While there are numerous trust companies, this industry could not have taken off without big banks entering the picture. In a few short years, the trust industry has risen from nothing to 10 trillion yuan in assets. The distribution power of big banks made this possible.

The banks became involved to increase income from fees. As their lending capacity became constrained by capital and sometimes government directive, they embraced trust products as the main off-balance-sheet vehicle to increase lending to their high-risk clients. These clients are usually willing to pay high fees. The banks could charge 4 to 8 percent commission on such products. When the products mature in, say, three years, they need to be rolled over. The banks could get 4 to 8 percent again.

Some trust companies are big and have distribution power. Most, I believe, are vehicles at the service of big banks. They charge a commission, too, though it is much smaller than the banks.

The adverse selection problem begins with who is willing to pay such high fees and high interest rates at the same time. Let's say the interest rate is 10 percent. The product is for three years. The commissions for banks and trust companies total 10 percent. The borrower gets 90 percent of the loan amount for a 30 percent interest payment over three years. Few businesses in China earn such a high return. The trust loan borrowers, mainly mining companies and property developers, often have greenfield projects. Their future depends greatly on the macro environment. The borrowers essentially gamble with other people's money.

As I wrote previously, the real story isn't some huge collapse, rather it is an issue of a trend shift. It only takes a small change to tip tje balance at when there are large imbalances and businesses are operating on very thin margins. Therefore things may seem to blow over, but in reality a major change is underway. Conversely, I've been expecting this shift for going on three years......but the global environment is worse today than it was in 2011 when Chinese real estate looked like it would crack.

Speaking of changing trends: Many Local Gov'ts Aim for Lower GDP Growth This Year

Last year officials in 24 places aimed for double-digit expansion, but only 14 have set such lofty targets for 2014

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 Chindia Weakness, China Forex Risk

The free trade zone in Shanghai will accelerate the trends he mentioned, if the yuan is fully convertible within the zone.

A Tale of Two Giants

China's capital account is closed. This makes any currency attack difficult. But there are ways. Capital outflow through the gray market is probably hundreds of billions of dollars per annum in size. It is an open secret that Macau launders vast amount of Chinese money out of the country. It has the potential to expand the non-deliverable forwards (NDF) market for yuan offshore. In theory an NDF market is a betting market like a casino. The trading parties have no way to hedge their positions somewhere else. In reality this is not the case. Those who sell the yuan in the NDF market probably can move yuan from onshore to offshore and vice versa. Hence, they are arbitraging the price difference. In the last two years, the decline in China's forex reserves has correlated with the price difference between the official yuan exchange rate and the NDF market price. In a roundabout way, China is also using forex reserves to defend the currency. As the NDF market is still small relative to China's forex reserves, the danger is not immediate. Over time, the NDF market may become large enough to threaten forex reserves. An attack then is possible.

China's offshore-listed stocks are now the targets. In particular, bank stocks are quite vulnerable. As the land bubble bursts, large amounts of non-performing loans are inevitable. Unless the government takes quick action to recapitalize banks, their stock prices could collapse like U.S. banks did in 2008.

How quickly the United States unwinds QE influences potential financial attacks on China or India. If the Fed announces reduction of its QE by US$ 10 billion per month late in September, the attacks on India's currency and China's bank stocks will escalate. If it is US$ 5 billion, the more serious consequences could be delayed.

...Few countries have ever reformed to prevent a crisis. This time may not be different. The voice of defending the past seems quite loud. Inertia in policymaking comes from the fact that government leaders do not change without a major crisis. They are wedded to their past out of self-interest. Otherwise, how could they justify their continuing existence?

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.

WTO will fall apart

Here's Andy Xie on the rise of protectionism. It wouldn't take much to deep-six the WTO, but it could continue to exist as a powerless organization in the face of rising tariffs and trade disputes.
The End of the WTO's Golden Era

The difficulties in resolving the inequities from globalization through increasing taxes will eventually shift politics to focus on trade directly. The rules for governing multinational activities will become more complicated in future. The barriers against outsourcing will multiply. Import duties may rise. Selective use of anti-dumping cases will be used more frequently to protect existing industries.

The golden era of the WTO system is coming to an end. Indeed, trade disputes could multiply sufficiently to overwhelm the WTO system.

Economists tend to blame the trade protection policies of the Western economies for causing or worsening depressions. The reality is probably more complicated. The labor market has limited capacity to cope with globalization. The political backlash against globalization is inevitable when the later moves too fast.

Trade has grown twice as fast as GDP in the past two decades. This relationship is unlikely to continue. The best scenario is for the two to grow at the same pace. The global economy will probably be stuck around 2 to 2.5 percent. So would trade.

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

Yen trouble is bad news for China

Andy Xie is looking at Japan's mess and considers the impact for China.

The Yen's Looming Day of Reckoning

Japan's nominal GDP contracted 8 percent in the four years to the third quarter of 2011, and six percentage points of that was due to deflation. Without increased government expenditure, the contraction will be one percentage point more. Japan has not seen this kind of sustained deflation since the 1930s.

...A yen collapse will impact China and South Korea most, just like in 1998. It will trigger substantial weakness in their industries. If a banking system succumbs, the shock can bring down an entire economy, as South Korea's experience in 1998 demonstrates.
Both China and South Korea have weak banking systems. South Korea's banking system is one of the most leveraged in the world due to high level of household loans. In 1998, a similar shock sank its banking system that was overleveraged with industrial loans. Now it is overleveraged with household loans. A shock could sink it again.

Overinvestment and a property bubble make China's banking system very vulnerable to such a shock. Unless China substantially increases the capital in its banking system, a big yen devaluation could cause China's banking system to sink. China suffers from overinvestment and a property bubble, as Southeast Asia and South Korea did in 1997. In terms of the magnitude of leverage, China's situation is much worse. Hence, a yen devaluation could wreak havoc to China's economy.

Andy Xie looks to 2011

Good Tidings in 2011

The most likely candidates to trigger the next global crisis are the U.S.'s sovereign debt or China's inflation. When one goes down first, the other can prolong its economic cycle. China may have won the last race. To win the next one, China must tackle its inflation problem, which is ultimately a political and structural issue, in 2011. If China does, the U.S. will again be the cause for the next global crisis. China will suffer from declining exports but benefit from lower oil prices.

On the other hand, if China has a hard landing, the U.S.'s trade deficit can drop dramatically, maybe by 50 percent, due to lower import prices. It would boost the dollar's value and bring down the U.S.'s treasury yield. The U.S. can have lower financing costs and lower expenditures. The combination allows the U.S. to enjoy a period of good growth.

One could describe the global economy as a race between the U.S. and China, to see who goes down first.
This coming year is China's opportunity.

Will China pop the luxury bubble?

Inflation may be near 5% in China already and the government is moving slowly to contain prices. This could spell bad news for the luxury market once the government decides to slam the brakes. Andy Xie covers the topic and turns back to wine in his latest article:

Bottoms Up for China's Lafite Wine Bubble

Yet the Lafite craze is at risk for a deeper reason: China's new fight against inflation. The government is currently blaming speculation for climbing consumer prices, although the real cause is a five-fold increase in China's M2 supply over the past decade.

To tackle these rising prices, China must raise interest rates. As long as real interest rates are in the negative zone, any sort of crackdown on speculation is unlikely to work. Even if the government locks up all the speculators in Wenzhou, they'll still have to contend with their counterparts in Quanzhou, Chaozhou and a thousand other cities.

Interest rates should be hiked by three percentage points right now. Of course, the government will only raise rates gradually. But when they do go up, the shine will come off all that Lafite in the cellar.

The world's fine wine market is closely tied to the U.S. Treasury market, but Lafite is especially sensitive to China factors, including tighter monetary policy. In addition, the Lafite market cannot be separated from political risk. For example, just as the government banned officials from playing golf a few years ago, officialdom's restrictions could spread to Lafite-sipping. That kind of a ban would be hard to enforce, but at some point it could become politically hazardous to drink Lafite.

Andy Xie delivers common sense on QE2

A lot of has been said about QE2, but Andy Xie sums up the policy failure quite well in Paradigm Lost. Here are some gems:

The view that the U.S.'s problem is insufficient demand is deeply flawed. The U.S. is running a massive trade deficit. This is usually a sign of excessive demand. If one looks at the world with this perspective, the U.S. should experience a weak economy for an extended period of time to decrease its trade deficit. Geithner and Bernanke believe the deficit can be addressed through dollar devaluation. If the monetary stimulus works, it will lead to a bigger trade deficit. As I will discuss below, the weak dollar will serve to boost the trade deficit through a rise in commodity prices, which will increase the U.S. trade deficit.

Two ideas being refuted here. One is the insufficient demand canard, mostly proposed by Keynesians. The other is the idea that a weaker U.S. dollar can boost exports, but as the Japanese example shows, there's a lot more to exports than currency value. The U.S. is not competing to make low cost products such as sneakers and t-shirts, it is competing in areas such as aerospace and software.

In rich countries like the U.S., a large proportion of its population lives under third world living standards. In China or India, a significant proportion of their populations live with first world living standards. A convergence is occurring with similar ratios of living standards across the world. Moreover, one can tell where pressure is more acute.

In developed countries, the pressure is worsened by high living costs due to regulatory constraints. To lessen the social pressure, they need to lower the living cost for low income workers. Wal-Mart, for example, is one manifestation of that force. It employs people at third world wages and offers goods at third world prices. This market solution to the rising inequality is often thwarted by regulations. A society that chooses this option must have sufficient income redistribution for those who earn third world wages to be able to pay for first world prices.

Europe is in that camp. Its policies are consistent. Through corporate welfare Japan is in that camp too. The U.S. wants its low income people, i.e., most of its population, to enjoy first world living standards but doesn't have to the means or policies to make it happen. Instead, it tries to juice up growth to achieve this goal. But, its success depends on the businesses' willingness to pay its workers first world wages. The evidence says businesses are unwilling. The U.S. policymakers keep thinking that it's a demand issue and embark on policies that seem irrational to others and scare the whole world to death.

We are starting to see the early signs of strong anti-globalization backlash in the U.S.; a recent poll showed the Tea Party voters opposed to free trade. Andy goes on to predict QE3, read more Paradigm Lost if you are interested.

Speaking of QE3, CLSA's Chris Wood Continues To Look Toward QE3:

GREED & fear’s fundamental view remains that there will continue to be no Fed rate hike and that, sooner or later, Billyboy will be implementing a third wave of quanto providing American politicians allow him to do so.

If Billyboy succeeds in precipitating releveraging of the US economy he will for a time at least be treated as a hero until the subsequent collateral damage of his policies becomes obvious. Still GREED & fear has yet to come up with any hard evidence that releveraging is about to happen.

Andy Xie warns on QE2

Emerging economies need a fresh spray of capital controls and higher interest rates – because hot money inflows are about to go from boiling to molten

The conclusion:

The international community should give up on influencing the U.S. on what it would do. It will do what it will, driven by its domestic politics, even though its actions seem like madness to others. The U.S. starts to make sense when it first throws the people who caused the last bubble into jail rather than desperately searches for some quick fix.
Emerging economies, save yourselves!

There's a lot in between worth reading.

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。

Andy Xie: The Puzzle of Carruades de Lafite

The English translation of Andy Xie's latest article is out. This section deals with how Chinese luxury consumers are distorting the wine market.
The Puzzle of Carruades de Lafite

While I am not sure that the Lafite phenomenon is a bubble, I am quite sure that Chateau Lafite's second label, Carruades de Lafite or little Lafite in Chinese, is a bubble. The production of fine wine requires the vine age to average 30-40 years. Vines older than 80 years must be replaced. Hence, a chateau is always taking out old vines and planting young vines. But grapes from young vines cannot produce high quality wine. Great chateaus like Lafite and Latour use the grapes from young vines to produce second label wine to recover some costs. These second labels are usually quite cheap. They are usually much cheaper than second growth wines.

For example, Lafite's second label, Carruades de Lafite, sold for about 200 Pitish pounds per case until five years ago. Since 2005, the price of Carruades de Lafite has increased roughly ten times. Its price sometimes rival the prices of non-Lafite first growth wines and is usually higher than great second growth wines. Little Lafite is not a bad table wine. But it is definitely not a grand wine. Its meteoric rise is really due to mistaken identity.

As Lafite's price becomes a small fortune, the search for a substitute is a natural market response. In China, the substitute is little Lafite. The choice is way off the mark. If one shifts from Lafite to Latour, Haut Pion, or Margaux, it would be rational. Their qualities are similar. When Lafite's price is so much higher than that of others, they should become the next choices. But, in Chinese, little Lafite has the connotation of Lafite's junior Pother, probably similar but a bit less good. Hence, it becomes the substitute for Lafite. Moreover, as its price has risen, it seems to confirm its worth. At least the choice doesn't look cheap to the host.

The magnitude of price distortion in the Carruades de Lafite is probably similar to that of internet stocks in 2000. Of course, over time, the bubble bursts. So why should we be upset about it? The problem is that it has become an insult to other great winemakers. I'm really ashamed of the enormous Chinese demand that has created this phenomenon. I personally witnessed Chinese tourists unloading cases of little Lafite at enormous prices in Bordeaux to ship back to China.

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.