Andy Xie Will Tell You When Chinese Bubble Is About to Burst

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Includes: FXI, PGJ
by: Edward Harrison

“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"). I think this statement may be in error.*

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.