Andy Xie: I’ll Tell You When Chinese Bubble Is About to Burst

“My maid just asked for leave,” a friend in Beijing told me recently. “She’s rushing home to buy property. I suggested she borrow 70 percent, so she could cap the loss.”

It wasn’t the first time I had heard such a story in China. Some friends in Shanghai have told me similar ones. It seems all the housemaids are rushing into the market at the same time.

There are benefits to housekeeping for fund managers. China’s housemaids may be Asia’s answer to the shoeshine boy whose stock tips prompted Joseph Kennedy to sell his shares before the Wall Street Crash of 1929.

Another friend recently vacationed in the southern island- resort city of Sanya in Hainan province and felt compelled to visit a development sales office. Everyone she knew had bought there already. It’s either buy or be unsocial.

“You should buy two,” the sharp sales girl suggested. “In three years, the price will have doubled. You could sell one and get one free.”

How could anyone resist an offer like that?

But, before you rush out and make paid on this offer, you might want to read up on Edward Chancellor’s Ten ways to spot a bubble in China.  This is a tale recounted by Sinosceptic Andy Xie. For his part, Xie says corruption is rife in the public sector, a bad sign since Chancellor warns that "blind faith in the competence of the authorities" is a telltale sign of a bubble. In a recent post, I wrote:

"It’s absurd that people think the communist leaders of China are better at steering their economy than the leaders of the US have been." – Marc Faber: "Symptoms of a bubble building in China"

Yet, some comments I received suggested that the beauty of totalitarian regimes is their free hand in coercing private sector actors and banks to do its bidding.  Gosh, maybe we need more muscular forms of government. Forget about free-market democracy.

I find this line of argument facile because public sector officials have every incentive in the world to turn a blind eye to the mania, the most important of which is making their GDP growth targets. Xie points to other incentives:

When it comes to interested parties, Chinese governments are knee-deep in the bubble. They get all the money from land sales. Land values have risen to half of the development cost. In hot spots, land costs more than the development — the governments want to collect the future price gain immediately.

Don’t forget the public sector debt behind all of these land purchases and sales. So we’ve got house maids as tipsters, corrupt public officials speculating in property and foreign investors piling in because communist leaders can steer economies in ways we can’t.  I think we know exactly how this ends.

More here.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.

13 Comments

  1. purple says:

    An asset bubble in China was inevitable given that they peg to Bernanke’s printing press.

    • purple says:

      And Wall Street will not mind at all if China’s banking sector blows up; they’ve been trying to crack it for years.

  2. Greg Merrill says:

    I think China’s bubble has already burst, the govt is tightening both lending and home purchase rules. The Shanghai exchange rolled over in August 2009 and has been in a slow descent ever since.

    http://merrillovermatter.blogspot.com/2010/04/china-lending-continues-to-slow.html
    http://merrillovermatter.blogspot.com/2010/04/china-tightening-rules-on-home.html