Only China Can Restore Stability In The Global Economy

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

For those of you who don’t know Andy Xie, he’s an MIT-educated former IMF economist and was once Morgan Stanley’s chief Asia-Pacific economist. Xie is known for a bearish view of China, and not Beijing’s favorite person. He’s now an ‘independent’ economist based in Shanghai. He gained respect for multiple bubble predictions, including the 1997 Asian crisis and the 2008 US subprime crisis.

Andy Xie posted an article in the South China Morning Post a few days ago that warrants attention. Quite a lot of it, actually. In it, he mentions some pretty stunning numbers and predictions. Perhaps most significant are:

“only China can restore stability in the global economy”




“The festering political tension [in the West] could boil over. Radical politicians aiming for class struggle may rise to the top. The US midterm elections in 2018 and presidential election in 2020 are the events that could upend the applecart.”

Here are some highlights.

The bubble economy is set to burst, and US elections may well be the trigger

Central banks continue to focus on consumption inflation, not asset inflation, in their decisions. Their attitude has supported one bubble after another. These bubbles have led to rising inequality and made mass consumer inflation less likely. Since the 2008 financial crisis, asset inflation has fully recovered, and then some.


The US household net worth is 34% above the peak in 2007, versus 30% for nominal GDP. China’s property value may have surpassed the total in the rest of the world combined. The world is stuck in a vicious cycle of asset bubbles, low consumer inflation, stagnant productivity and low wage growth.

Let that sink in.

If Xie is right, and I would put my money on that, despite all the housing bubbles elsewhere in the world, the Chinese, who make a lot less money than westerners, have pushed up the ‘value’ of Chinese residential real estate so massively that their homes are now ‘worth’ more than all other houses on the planet. Xie returns to this point later in the article, and says:

In tier-one cities, property costs are likely to be between 50 and 100 years of household income. At the peak of Japan’s property bubble, it was about 20 in Tokyo. “.

We’ll get back to that. But it suggests that Chinese, if they spend half their income on housing, which is probably not that crazy an assumption, must work 100 to 200 years to pay off their mortgages. Again, let that sink in.

The US Federal Reserve has indicated that it will begin to unwind its QE assets this month and raise the interest rate by another 25 basis points to 1.5%. China has been clipping the debt wings of grey rhinos and pouring cold water on property speculation. They are worried about asset bubbles. But, if recent history is any guide, when asset markets begin to tumble, they will reverse their actions and encourage debt binges again. [..] most powerful people in the world operate on flimsy assumptions.


Despite low unemployment and widespread labour shortages, wage increases and inflation in Japan have been around zero for a quarter of a century. Western central bankers assumed that the same wouldn’t happen to them, without understanding the underlying reasons. The loss of competitiveness changes how macro policy works.


The mistaken stimulus has the unintended consequences of dissipating real wealth and increasing inequality. American household net worth is at an all-time high of 5 times GDP, significantly higher than the bubble peaks of 4.1 times in 2000 and 4.7 in 2007, and far higher than the historical norm of three times GDP. On the other hand, US capital formation has stagnated for decades. The outlandish paper wealth is just the same asset at ever higher prices.

That is the very definition of a bubble: “The outlandish paper wealth is just the same asset at ever higher prices.” American household net ‘worth’ is in a huge bubble, some 66% higher than the historical average. And that’s in a time when for many their net worth is way below that average, a time when more than half live paycheck to paycheck and can’t afford medical bills and/or car repair bills without borrowing. And that is the very definition of inequality:

The inflation of paper wealth has a serious impact on inequality. The top 1% in the US owns one-third of the wealth and the top 10% owns three-quarters. Half of the people don’t even own stocks. Asset inflation will increase inequality by definition. Moreover, 90% of the income growth since 2008 has gone to the top 1%, partly due to their ability to cash out in the inflated asset market.

An economy that depends on asset inflation always disproportionately benefits the asset-rich top 1%. [..] Germany and Japan do not have significant asset bubbles. Their inequality is far less than in the Anglo-Saxon economies that have succumbed to the allure of financial speculation.

True, largely, but Japan both has major economic troubles today (deflation), and will have worse ones going forward (demographics). While Germany can unload its losses on the EU periphery (and does). Japan can’t ‘afford’ a housing bubble, its people have refused to raise spending for many years, scared as they are through stagnant wages and falling prices. While Germany doesn’t need a housing bubble to keep its economy growing: it exports whatever’s negative about it to its neighbors. China, however, DOES need bubbles, and blows them with abandon:

While Western central bankers can stop making things worse, only China can restore stability in the global economy. Consider that 800 million Chinese workers have become as productive as their Western counterparts, but are not even close in terms of consumption. This is the fundamental reason for the global imbalance.

Note: as we saw before, while the Chinese may not consume as much as Westerners when it comes to consumer products, they DO -on average- put a far higher percentage of their wages into real estate. And that is because Beijing encourages such behavior. The politburo needs the bubbles to keep things moving. And therefore creates them on purpose. Presumably with the idea that incomes will come up so much that all these homes become more affordable compared to wages. That looks like a big gamble.

Property costs of between 50 and 100 years of household income are not manageable, and rising rates and/or an outright crisis will expose that. And then on top of that, the government wants, needs, an ever bigger take of people’s incomes. Because its whole model is based on its investing in the economy, even if a large part of it is not efficient or profitable.

China’s model is to subsidise investment. The resulting overcapacity inevitably devalues whatever its workers produce. That slows down wage rises and prolongs the deflationary pull. [..] Overinvestment means destroying capital. The model can only be sustained through taxing the household sector to fill the gap.


In addition to taking nearly half of the business labour outlay, China has invented the unique model of taxing the household sector through asset bubbles. The stock market was started with the explicit intention to subsidise state-owned enterprises. The most important asset bubble is the property market. It redistributes about 10% of GDP to the government sector from the household sector. The levies for subsidising investment keep consumption down and make the economy more dependent on investment and export.

In order to prevent a huge real estate crash, Beijing will have to make sure wages rise, across the board, and substantially, for hundreds of millions of people. And there we get back to what Xie said above:

The government finds an ever-increasing need to raise levies and, hence, make the property bubble bigger. In tier-one cities, property costs are likely to be between 50 and 100 years of household income. At the peak of Japan’s property bubble, it was about 20 in Tokyo. China’s residential property value may have surpassed the total in the rest of the world combined.

The 800 million pound elephant here is that what Beijing pushes its citizens to put in real estate, they can no longer spend on other things. Their consumption will flatline or even fall. Unless the Party manages to raise their wages, but it would have to raise them by a lot, because it needs more and more taxes to be paid by the same wages.

And here’s where Andy Xie gets most interesting:

How is this all going to end? Rising interest rates are usually the trigger. But we know the current bubble economy tends to keep inflation low through suppressing mass consumption and increasing overcapacity. It gives central bankers the excuse to keep the printing press on.


In 1929, Joseph Kennedy thought that, when a shoeshine boy was giving stock tips, the market had run out of fools. Today, that shoeshine boy would be a genius. In today’s bubble, central bankers and governments are fools. They can mobilise more resources to become bigger fools. In 2000, the dotcom bubble burst because some firms were caught making up numbers. Today, you don’t need to make up numbers. What one needs is stories.

Those are some pretty impressive insights, and they go way beyond China. Today’s fools are not yesterday’s fools. Only, today’s fools have been given the rights, and the tools, to keep blowing ever larger bubbles. The only conclusion can be that when the bubbles burst, it’ll be much much worse than the Great Depression. And this time, China will blow up along with the west. Take cover!

Hot stocks or property are sold like Hollywood stars. Rumour and innuendo will do the job. Nothing real is necessary. In 2007, structured mortgage products exposed cash-short borrowers. The defaults snowballed. But, in China, leverage is always rolled over. Default is usually considered a political act. And it never snowballs: the government makes sure of it.

Can China continue to roll over its leveraged debt when the west is in crisis, is forced to heavily cut its imports, just as Beijing needs more tax revenue to keep its miracle model alive? WIll it be able to export its over-leverage and over-capacity through the new Silk Road project? It looks very doubtful. And we shouldn’t expect the Party Congress this month to address these issues. They know better.

Xie finishes with most original predictions. Class struggle in the US. It sounds like something straight out of Karl Marx, but perhaps we are already seeing the first signs today.

In the US, the leverage is mostly in the government. It won’t default, because it can print money. The most likely cause for the bubble to burst would be the rising political tension in the West. The bubble economy keeps squeezing the middle class, with more debt and less wages. The festering political tension could boil over. Radical politicians aiming for class struggle may rise to the top. The US midterm elections in 2018 and presidential election in 2020 are the events that could upend the applecart.

Maybe class struggle is something we’ll see first in Europe, both at a national and at a pan-European level. Too many countries keep their systems humming not by being productive, but by encouraging their citizens to sink deeper into debt. Low interest rates may be attractive for signing up to new loans, but the ‘trajectory’ gets shorter all the time, because those same low rates absolutely murder savings and pensions.

The only thing that can keep the whole caboodle from exploding would be absolutely stunning economic growth at least somewhere in the world, but every single somewhere is far too deep in debt for that to happen.

Take cover.



ThirdWorldNut The_Juggernaut Fri, 10/13/2017 - 12:58 Permalink

Problem is Chinese investments (housing and others) are not limited to Beijing, Shangai or Hongkong. In a  liberal-endorsed globalized world, they can buy wherever they want - just look at Vancouver, Toronto, California, London etc. Pushing middle class out of the housing market pretty much everywhere they go. So the trick boils down to this - outsource jobs to China, mint millionaires there and homeless in the west and then in the second step let those millionaires invest/move to west buying tangible assets - companies, homes, beaches, islands and what not.Notice how in both the steps middle and lower class in the west get absolutely nailed.Thus creating a global peasant class and global elites. Again the whole thing is fully endorsed by "Economist". But dont forget, if you oppose globalization, you are a xenophobe. 

In reply to by The_Juggernaut

techpriest Five Star Fri, 10/13/2017 - 11:15 Permalink

GDP doesn't matter: anyone can borrow and spend money - few can do it in such a way as to set up a sustainable economy.

Also, the Chinese are not known for reporting economic data honestly.

If the 50-years-of-earnings number is accurate, then this bubble is set to detonate epically. No wonder I see so many Chinese parents sending their children and money overseas - they see it coming and are getting out.

In reply to by Five Star

hedgeless_horseman Fri, 10/13/2017 - 11:03 Permalink


The 800 million pound elephant here is that what Beijing pushes its citizens to put in real estate, they can no longer spend on other things.

So, short dried squid snack makers and shampoo salon chains?

Herdee Fri, 10/13/2017 - 11:07 Permalink

Oil/Gold trade in China is the signal for the U.S dollar to go into the shitter. They are desperate for hyperinflation because hey see China overtaking an ol' warmongering dinosaur who's society is in massive decay. Even to the point of homeless Americans having to urinate and shit on the sidewalks of major Cities everywhere.

Son of Captain Nemo Son of Captain Nemo Fri, 10/13/2017 - 11:19 Permalink

After the 1972 Nixon Mao "meeting" and 29 years later 9/11 with China and India aiding their American counterparts to haul away the crime scene for more American factories in their Country YOU KNOW Russia's THE ONLY PLACE FOR PARKING YOUR MONEY that has a store of value!!!

This is why you'll never hear Jim Rogers talk about the Russian economy and why China is the "only investment" for him because all of America's banks have their meat hooks into it 40 years now!

In reply to by Son of Captain Nemo

Consuelo Fri, 10/13/2017 - 11:18 Permalink

  Since 2008... I find it most amazing (and amusing) the extent to which the China trolls will travel to find yet another unfound nugget of impending doom/hard-landing/crash/vacant cities/overproduction/copper warehouses/shell-game, ad-infinitum, to underpin their arguments...Notice how nothing is ever mentioned regarding China's strategic off-shore investments, partnerships, growing alliances, planning, physical gold holdings and how that key metric is going to play in times of global economic crisis...?One need not be a China-whore to observe that while China may indeed 'blow up' along with the rest, it is what they have in reserve that dictates how they will come out the other side of the 'blow up'...How is the aforementioned dynamic lost on super-duper MIT-educated Andy Xie...?       

DaBears Consuelo Fri, 10/13/2017 - 13:05 Permalink

" China's strategic off-shore investments"You mean the "greatest" Latin America loan in human history of $60 billion to Venezuela when other banks won't touch them with a ten foot pole? Look at what's going on in their country now, or is it censored behind that great firewall of yours. Africa will end in tears as always through out centries of various foreign investments, even China already failed there once during ancient times. China's gold reserve is large, but it's but a fraction of the current money supply they printed and pegged, unless Yuan or USD hyper inflate to $187,000 per ounce, China is shit out of luck on their great ponzi scheme.

In reply to by Consuelo

RagaMuffin Fri, 10/13/2017 - 11:23 Permalink

"Xie finishes with most original predictions. Class struggle in the US."  Hardly original, further who believes the status quo will make it to the mid terms, let alone 2020?

adr Fri, 10/13/2017 - 11:29 Permalink

The world is fucked. Bitcoin going to $5000 is proof of that.Not because Bitcoin is worth anything, but because everyone on the planet is looking for a get rich quick scheme since being a normal worker almost anywhere on the planet gets you almost nothing in return.Bezos, Gates, Fuckerberg, Musk, Soros, Buffet, and the rest of the parasite class get to be worth billions while you suffer crippling inflation and a standard of living rapidly devolving to feudal times.Does anyone honestly believe that there are nearly four 1985 USAs in economic activity going on in America? The only thing GDP measures is Jewish graft.

TeethVillage88s Fri, 10/13/2017 - 11:58 Permalink

Predictable like most Corruption in EU & USA.

- China bailed out EU in 2008-2017 Financial Crisis with new money, new investment that "No one else in the World was able to provide - Jim Rickards, Currency Wars
- Is this what the Ford Foundation, Carnegie, and Rockefeller Foundations had planned all along - for USA & Europe to merge with China?
- For instance why did they not fix the problems with TBTF, Securitization of everything, 1:40 Leverage, Excessive IPos/SPOs, Tranches of Housing securitized to keep the housing prices in a bubble, Mal-Investment of LIRP in M&As, IPOs/SPOs, LBOs, Stock Buy Backs, Oligopoly power through take overs of smaller businesses
- For instance why has debt again risen in every category
- I.E. Why the fake News States on Economy that make us much more exposed in any collapse, Inflation, GDP, Unemployment, Investment

dubaibubble Fri, 10/13/2017 - 12:24 Permalink

nonsense, China is barely in control of itself people talk about the shit show in America, China could spin out of control with a few of their own self-generated black swans, easily enough the pin-heads in Beijing think they are the "masters of the universe" now but the j*wd#gs on Wall St and in DC have scorched China with the USA monetary policy nobody will survive that sh*t  

Hope Copy Fri, 10/13/2017 - 12:38 Permalink

Xie discounts the one party political system.  As a strongman rises, his devotion to those that make the economy rise and his distain for those around him that threaten his power rises also.  China's housing market, equity (bank debt financing) mostly owned by political hacks can fall and will fall and if the hacks complain, then they will disappear.  As for the USA, it is the story of the three little pigs and the government will act as the big bad wolf.  In WWII we (USA and company) burned down Germany and they remembered it for a number of years, until about the mid-'80's...  Enough said.

surf@jm Fri, 10/13/2017 - 12:36 Permalink

LMAO!........Communist stability.......Yeah, its worked great in Russia, North Korea, Cuba, Venezuela.......How many more millions need to be murdered before we are stabilized?......

techpriest surf@jm Fri, 10/13/2017 - 12:39 Permalink

They aren't even communist - that had failed by the 70s. Since then, its more a kind of fascism where certain industries are state-controlled while other fields are almost entirely laissez-faire, until the Party decides it wants to own that field also.

Think of it as a change from a factory farm to a free-range farm, the purpose is the same but the milk (taxes) and meat (military) are better.

In reply to by surf@jm

HilbertSpace Fri, 10/13/2017 - 13:07 Permalink

First post here, go easy on me.....There are two ways this can go down, and Mr Xie only spots one.1. The 90% of americans who can only watch the wealth of the remaining 10% get blown up to stupid levels by the funny money that the Fed made finally start shooting. If sheer envy doesn't start the shooting eventually the Fed will have to pay for the excess by inflating the purchasing power of the average American to below subsistance level. What's the point of sitting on pile of 300 million guns and still starving to death?2. Chinese workers, who are out producing everyone else on earth and only making 10% of the money, finally catch on that they are subsidising the lifestyles of the rest of the world, and get sick of it. What can they do about it, I'm not sure.Even considering how lazy and useless Amercians have become I'd still bet on 1). But it sure would be neat if the Chinese had as many guns in private hands as Americans do. That would be great fun.

scatha Fri, 10/13/2017 - 13:13 Permalink

Business propaganda has it all wrong. Why people are scared when all bonds and stocks worldwide are at record levels. Most of the investors already made 10%-50% this year at least on the market so why?It is simply because those Index record highs are completely detached from global economy that is collapsing, so is global trade. In fact the sign of continuing growth of stock markets and complete lack of volatility is not a symptom of health but a signal of nearing death.In medicine it is equivalent of increasing the hearth rate in patients whose pressure is collapsing due to internal bleeding reaching up to 250 before cardiac arrest.Heart does not fail because was ill but because the volume of blood dropped to almost zero. The similar effect is in concentrated global markets owned by dozen of owners interrelated all over the world while volume of stock market transitions collapse since the oligarchic owners already own most of the stocks and it is hard to find anybody wanting to sell assuming the global CBs will bail out again those few who own most of the world stock capital.In fact the stock market is dying and as predicted will, like hart beat, increase exponentially before of total freeze.The next crises will be the total freeze of public markets, bonds, stocks, futures and options in partly by regulators and in part by reality of those markets owned by monopolies.Nobody wants to sell since markets that will never go down since all the moneyed capital mostly owned by few oligarchs has nowhere to go as far as financial assets are concerned and in the same time they in their murderous feat want to destroy mainstream economy starved of even reproductive capital to renew the old capacities while world population grows.It is evil genocidal plan that has begun unleashing and began to freezing of markets.  And when last share of willing seller will be sold for trillion dollars [all want to buy] moving stocks indexes to infinity while hunger and poverty in mainstream economy will reign supreme.And what’s worse is that the sheeple will queue to the slaughterhouse calmly even happily before their final scream of death. Here is more about dying real economy:  

roddy6667 Fri, 10/13/2017 - 13:43 Permalink

What a load of crap! "But it suggests that Chinese, if they spend half their income on housing, which is probably not that crazy an assumption, must work 100 to 200 years to pay off their mortgages. Again, let that sink in."82% of Chinese have no mortgage or rent because they own their home and have no mortgage. Most new homes are sold cash, not financed. They don't spend half their income on housing. Over 80% spend nothing. There is NO PROPERTY TAX. How can somebody so uninformed be allowed to write articles for ZH? Even a Doom Porn blog should have SOME standards.