"China Is Headed For A 1929-Style Depression"

Tyler Durden's picture

Authored by Sue Chang via MarketWatch.com,

Andy Xie isn’t known for tepid opinions.

The provocative Xie, who was a top economist at the World Bank and Morgan Stanley, found notoriety a decade ago when he left the Wall Street bank after a controversial internal report went public. Today, he is among the loudest voices warning of an inevitable implosion in China, the world’s second-largest economy.

Xie, now working independently and based in Shanghai, says the coming collapse won’t be like the Asian currency crisis of 1997 or the U.S. financial meltdown of 2008.

In a recent interview with MarketWatch, Xie said China’s trajectory instead resembles the one that led to the Great Depression, when the expansion of credit, loose monetary policy and a widespread belief that asset prices would never fall contributed to rampant speculation that ended with a crippling market crash.

 

China in 2016 looks much the same, according to Xie, with half of the country’s debt propping up real-estate prices and heavy leverage in the stock market — indicating that conditions are ripe for a correction.

“The government is allowing speculation by providing cheap financing,” Xie told MarketWatch. China “is riding a tiger and is terrified of a crash. So it keeps pumping cash into the economy. It is difficult to see how China can avoid a crisis.”

A longtime critic of Chinese economic growth

Xie’s viewpoints have at times attracted unwelcome attention. In 2006, when he was a star Asia economist at Morgan Stanley, a leaked email to colleagues in which he said money laundering was bolstering growth in Singapore led to his abrupt departure from the bank.

In early 2007, he termed China’s surging markets a “bubble” that could lead to a banking crisis,” and in 2009 he likened them to a “Ponzi scheme.”

Xie, who is from China but was educated at — and earned a Ph.D. from — Massachusetts Institute of Technology, has said Chinese authorities have tried to characterize him as an American spy sent to disrupt their markets after his 2007 prediction. China’s consulate general in San Francisco and its embassy in Washington did not reply to requests for comment.

While he now works independently, Xie’s opinions on Asian affairs remain influential. He writes regularly for the South China Morning Post, among other publications, in May saying China is running a “gigantic monetary bubble that has corrupted virtually every corner of the economy.”

Xie “is a respected economist,” said Huawei Ling, managing editor of Caixin Weekly and a John S. Knight Journalism Fellow at Stanford University. “I appreciate his consistency and his analysis on China’s economic issues,” she said.

His 2007 forecast, meanwhile, turned out correct. Soon after his prediction, the Shanghai Composite Index started plunging. After hitting a peak of 6,092 on Oct. 19, 2007, it fell below 2,000 over the next 12 months.

Years before hedge-fund managers like Kynikos Associates founder Jim Chanos turned bearish and George Soros predicted a hard landing, Xie was a dissenting voice amid a chorus of prognosticators enamored with China’s late 20th Century emergence from poverty.

In an interview with this reporter more than a decade ago, Xie warned of a lack of depth in China’s dazzling rise, saying the rapid growth on the country’s coastal cities masked the fact that many inner areas of the country were stuck in the “Stone Age.”

Concerns about China’s economy are more commonplace now. Two camps have formed in 2016: those like Templeton Emerging Markets Group Executive Chairman Mark Mobius, who believe a resilient China is experiencing temporary growing pains, and those who, like Soros, foresee an imminent collapse.

Xie is firmly in the latter camp.

“China grew too fast,” Xie said. “The government is using its power to stop the unraveling but not address the issue. It is just buying more time.”

Fresh worries about China after the Brexit vote

Xie’s criticism coincides with fresh worries about China after the U.K.’s vote to quit the European Union, which triggered an across-the-board selloff in risky assets as investors sought cover in safe-haven assets. Global markets have rebounded somewhat, but uncertainty remains.

Subsequent strength in the U.S. dollar has prompted analysts to predict an accelerated weakness in the Chinese yuan. The yuan slumped to a nearly six-year low against the greenback this week, according to FactSet.

More broadly, fissures have started to appear in the world’s second largest economy. After years of expanding at a blistering pace. China’s gross domestic product grew 6.9% in 2015, its slowest pace in a quarter-century.

For 2016, Beijing has set a GDP target of 6.5% to 7%; The latest spate of global uncertainties prompted Bank of America Merrill Lynch and Deutsche Bank to trim their forecasts to 6.4% and 6.6%, respectively.

The export sector, long a driver of Chinese growth, is sputtering due to global saturation and household consumption is barely 30% of China’s GDP, Xie said. In the U.S., household consumption accounted for more than 68% of GDP in 2014, according to the World Bank.

China’s stock market last year dove in June, losing more than 30% in a month as regulators tightened margin-trading and short selling rules, making it more difficult for investors to borrow money to invest in stocks. A belief that the government was not properly responding to the economic slowdown also weighed on sentiment.

Then in August, authorities unexpectedly devalued the yuan in a bid to support the flagging economy, sparking unprecedented capital flight.

Xie and other observers say the surest way to get China out of its rut is to boost consumption, marking a deliberate turn away from a manufacturing-focused economy. Efforts are under way to move China in that direction, but analysts say the process could take years or even decades — during which China could reach a breaking point.

Total social financing, a broad measure of funds secured by households and nonfinancial companies, topped $22 trillion in March, more than twice China’s $10.4 trillion GDP, according to official data.

There’s no equivalent metric in the U.S., but household debt stood at $14.3 trillion while nonfinancial debt totaled $13 trillion at the end of the first quarter, according to the Federal Reserve. The combined tally of $27.3 trillion is roughly 1.5 times the U.S. GDP.

Torsten Slok, chief international economist at Deutsche Bank said in May that China’s credit bubble is worse than the U.S. subprime buildup that led to the last financial crisis. “It is clear that in China in recent years more and more capital has been misallocated and not resulted in higher GDP growth,” said Slok.


Kyle Bass of Hayman Capital Management, who was among the few on Wall Street to correctly predict the subprime mortgage crisis, shorted the Chinese yuan earlier this year, warning investors in a 13-page February letter that China is making the same mistakes the U.S. did 10 years ago.

“The unwavering faith that the Chinese will somehow be able to successfully avoid anything more severe than a moderate economic slowdown by continuing to rely on the perpetual expansion of credit reminds us of the belief in 2006 that U.S. home prices would never decline,” Bass wrote.

Xie, meanwhile, says he is doubtful of the Communist’s Party’s ability to manage and grow China’s economy — but believes that, if they become more hands-off, the country could become the world’s leading economic force. At the core of Xie’s concerns about China is the contention that the government is doing more harm than good.

“If government takes a step back instead of dominating the economy so much, China can be twice as big as the U.S. in 20 years,” he said.

‘The Communist Party isn't compatible with the future of China’

Today’s regime in China recalls the U.S.-backed Chinese National Party, or Kuomintang, that ruled the country until its defeat at the hands of the Communist rebels in 1949, according to Xie.

The Nationalists, he says, flooded the economy with easy money to support speculation that led to runaway inflation. That, in turn, shifted public sentiment in favor of the Communists, who drove the Nationalists out of the country.

“It was very similar to what is going on right now,” said Xie. “If you keep on printing money to use for speculation, you will have hyperinflation and a currency crash,” he said. “The Communist Party isn't compatible with the future of China.”

Xie’s criticism of the government hasn't resulted in his arrest although he was not certain whether that will not change in the future. Chinese officials have started to muzzle analysts and journalists who have published pessimistic reports on the economy, The Wall Street Journal has reported.

And his research reports are not currently distributed in China. “There are safety mechanisms to stop someone like me reaching the ordinary people,” said Xie.

Despite his frustration, however, he occasionally belies immense pride in his country and bemoans the fact that the global community may be underestimating China’s potential.

“The economists in the West who say that China isn't very important are wrong,” he said. “China isn't an emerging economy. It is the only country that caught up with the West, and it will shape the path of the global economy in the future.”

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santafe's picture

While the US is headed for a Financial CATACLYSM. http://bit.ly/1KogtGi

zhtam's picture

Hey man, If you're not proud of your link, don't share it. If you are proud, share proudly. Why don't you just put the actual biblicism institute link in your post? Then the ones who want to read can read, and the others can just ignore you, probably instead of downvoting you. I don't think people mind the links so much as the cover-up of using an anonymous link.

mofio's picture

zhtam, dude, you really don't have a life, do you?

Boris Alatovkrap's picture

China is Depression in 1929? Maybe is depress because of many Japan soldier and airplane?

Stainless Steel Rat's picture

I thought this article was supposed to end with a mention about precious metals...

Arnold's picture

I'm sure it was edited out.

let me help.

 

Keep stacking Bitchz.

spqrusa's picture

Keep up the blog... It is going somewhere.

Ralph Spoilsport's picture

Dude, you really don't have a clue, do you?

ACES FULL's picture

mofio and sante fe are the same guy.

Zero Point's picture

Maybe a life that doesn't consist of being a JIDF fucktard perhaps?

skinwalker's picture

In my experience, economies are like acid trips. The more you try to control them, the more fucked up you get.

south40_dreams's picture

Only the acid trips are more fun

DirkDiggler11's picture

Great analogy skin walker, you nailed it.

Stan Smith's picture

Spot on.    And when you awaken from your trip, you wonder where the hell your money went.

NoDebt's picture

Yeah, well, they learned from the best.

 

 

reader2010's picture

In the absence of the gold standard,  why couldn't they just print as much as they need? On the other hand,  1929 was artificially engineered to bring the NWO to Germany and Empire Japan. Andy Xie is a 5th Column member of the International Capital who happens to live in Shanghai. Fuck him.

TradingIsLifeBrah's picture

Because most of the readers think that China is going to ball and chain itself down by moving a to Gold standard currency.  Their whole economy like every other country is based on debt so there is no way that will ever happen.  Warm up the printers

tricorn teacup's picture

The Weimar / Zimbabwe plan.  That worked well /sarc.

DirkDiggler11's picture

Lots of Chicom articles on ZH today, wonder if the Tyler(s) are trying to send a message here ? Regardless, more PM's, food, and ammo....

Handful of Dust's picture

USA is in pretty bad shape already thanks in part to Soweto sending China most of American's jobs. China's middle class has never had it better...while Soweto has destroyed much of America's middle class.

 

2 big differences are the Chinese are not as Gruberized as Americans and not as passive, and Xi is not importing millions of rapefugees and illegals.

stant's picture

So cha ching Livermores shoe shine boy says buy buy buy!!

TradingIsLifeBrah's picture

Too bad China's economy isn't strong like the US.  Shows you how socialism can really fuck up a country.  Free Marketz 4eva

Money Boo Boo's picture

didn't see a sarc tag so must assume you're a fucking reetard

TradingIsLifeBrah's picture

Saw a spelling error so I assumed you're a retard...

Seasmoke's picture

Ok so what just happened to Silver at 930PM , while The Sheep are shooting off Fireworks.

CHoward's picture

I don't know, I was wondering the exact same thing.

The Shadow Broker's picture

Silver is going to get slammed below $20 again.  The manipulation isn't over yet.

Tall Tom's picture

 

 

 

 

There will be a steep Margin Requirement increase for Contracts issued by Jeffery Christian of COMEX.

 

We will see...oh...$17.50 by Friday. It seems like a good target to retest the support.

 

Sell the paper short and use the profits from the paper...TO BUY PHYSICAL.

 

Nothing better than Free Physical Silver. And as the price declines you can even stack more Physical.

 

It seems that if these people who are cheerleading advances are planning to sell Silver, trade Silver for Fiatskis, and are really after those worthless Fiatskis.

 

People who are planning to sell want high prices. People interested in buying desire low prices.

 

Do not measure your value in fiatskis. Measure your value in Ounces as the fiatskis will become valueless.

diniweidrwydd's picture

The sheep are just shooting off.....

Amalgamated Tang's picture

It bounced back to 20.10 after the Sydney markets closed. Does Goldman have an office in Sydney?

bid the soldiers shoot's picture

 

Mr Xie

 “If you keep on printing money to use for speculation, you will have hyperinflation and a currency crash,” 

 

What about printing $85 billion a month for 14 months?  

Hyperinflation and a currency crash?

Or strong currency and telling everybody else what to do?

g3h's picture

I like Andy Xie.  But sadly don't think he has much credibility left.

Yen Cross's picture

   GEEE!!!!   I wonder who just came in and " Monkey Hammered" silver into the $19 handle.

seabiscuit's picture

“A certain man once lost a diamond cuff-link in the wide blue sea, and twenty years later, on the exact day, a Friday apparently, he was eating a large fish - but there was no diamond inside. That’s what I like about coincidence.”
? Vladimir Nabokov, Laughter in the Dark

Boating accidents in history.

o r c k's picture

They probably lost their bonus when it went over 20.  Scum criminals. A holiday hit.

the_narrator's picture

This guy is just a propagandist for Wall Street who believes his own bullshit.  1929 was caused by the Federal Reserve crashing the economy so the big banks could consolidate the economy when they got to create all the new money to have their cronies buy everything after the crash wrung itself out.  

 China's banks are partially privatized central planning.  They have tons of bad loans all the time that the government buys and writes down on a regular basis.  The government prints its own money and gives it to the banks for their bad loans.  The banks must follow government lending dictates.  The one party system has so far kept corruption under reasonable control.  Our system would not be able to handle that big of a temptation.

Volkodav's picture

is not Chine debt internal?

 

Davidduke2000's picture

Yes it is, but the loudest noise come from the country that owes money to almost every country on the planet. 

Readership_of_the_Financial_Times's picture

Good comment. Any comparison between China and US is going to be useless due to political differences.

That said, investors are trying to exit property at the moment.

But exit to where? Where is safe? 

Everything is a Ponzi at this point.

Yellow Zookaninnie's picture

A rising Chinese Greenspan. Please deport his ass to Antarctica with a bag of nuts.

lucky and good's picture

 The ongoing efforts of China to stabilize their sagging economy by flooding the markets with liquidity have resulted in a ripple effect and added to the nervousness of markets. When coupled with the overcapacity that developed as the country raced ahead on a wave of easy and cheap money it now finds itself in a situation similar to that which America faced in 1929.

A question we must ask is just how large this newest wave of liquidity really is and where it will lead. China’s debt mania, by this I mean madness, craziness, and frenzy is now the largest ever experienced in the postwar emerging world. The just published article below delves into China's surging debt problem.

 http://brucewilds.blogspot.com/2016/06/chinas-debt-problem-grows-more-ominous.html

Sizzurp's picture

This Xie guy must have missed the party memo on talking down the Chinese economy.  He better get ready for the mystery vacation.

Jeffersonian Liberal's picture

 

Sue Chang of MarketWatch.

Seriously, MarketWatch?

The same MarketWatch that was pimping China as the best and brightest of the "emerging markets" just a few years ago and who deleted the comments of anyone (such as myself) who dared to point out that their economic emperor had not clothes?

Now we're supposed to take them seriously?

That's funny.

Boycott MarketWatch and all of their drivel.

oncemore's picture

So the World Bank economist Xie is now after wrong interentionist China economic policy?

What a croocked world!

The biggest crook shouts a thief.

Not that Chinese economy were in a good shape, but this guy made my day.

el mago's picture

Who is this guy? Can anybody take him for a tour around PBOC gold vaults. 

China, the only country that manufactures everything, has a surplus of resources, and enough ghost towns to house this kid during the next depression.