Stock Gurus: Andy Xie on the China Bubble
Posted by admin on February 15, 2010 | No Comments
Interview #1: Andy Xie, the former Morgan Stanley economist, has been one of the most vocal articulators of the case for a China bubble. Here’s a summary of his comments from two interviews. The first was released on February 6, 2010, with Bloomberg’s Haslinda Amin:
- Andy expects China’s economy to be okay this year because liquidity is still plentiful. On the one hand, there’s a boom, especially on the property side. On the other, poor employment in the US is likely to limit China because the export sector is so large. Nevertheless, the domestic side is overheating, and China needs to tighten or the bubble can get out of hand.
- The US Treasury yield will have to rise because the appetite for US Treasuries is not as strong as it was before. There’s a price for everything, you just need higher yields to buy the same amount or more.
- the China situation is very related to the property sector and government spending. If banks continue to lend, then the situation can get out of hand. If the banks stop lending, then many projects will be put on hold. So the situation is very delicate. You don’t want to cut back funding quickly. Currently, the loan growth rate is 17%, which is about a “7 trend”, compared to a “10 trend” last year (it’s not clear to me what he means by “7 trend” vs. a “10 trend”). So the government has cut back on lending, but it’s not a significant cutback.
- China has not yet increased interest rates, but the market is now expecting it, perhaps a 2-3% increase. But it won’t be dramatic, and it may not be enough. Before the market didn’t expect monetary tightening, which is why it reacted so sharply to credit tightening (i.e., the increase in reserve requirements and the pullback in lending).
- The data on China property is difficult to ascertain, but property sales are 14% of GDP, which is an unprecedented level. Rental yields are 2-4%, and the vacancy rate is very high, in fact “humongous”. Prices might be as much as 100% overvalued.
- China’s property bubble is in new properties, not existing. In China, the local government is the seller, it’s really a fund-raising operation for them. About half of local government revenue comes from the property sector. In a sense there is a struggle between central and local governments. The fiscal situation is very dependent on property sector.
- The government is taking steps, such as limiting mortgages on 2nd and 3rd flats. Demand is very speculative, so it’s very difficult for demand to continue without bank lending. Developers who are paying record prices for land may get trapped. In the last 7 years, land prices are up over 10x, and in some cities it’s up over 20x. The bubble is about to burst.
- The resource trend is more land lasting than others. China has a resource shortage and has huge reserves, a significant amount of money will be put into resources. This is the only story that Andy has faith in. The resource story will continue for several years.
Interview #2: These notes are from another Bloomberg interview on 2/12/10:
- China has again increased reserve requirements, but this isn’t enough to stop inflation.
- China will have to stop inflation, rental ratio is under 3%, the price income ratio in major cities is 20x or higher. They’re hoping for a softer landing but Andy Xie is skeptical
- Interest rates are too low – demand deposit rate is 0%, long term deposit rates are 3%, economy is growing at 8-10% and inflation was reported as 2% in January. Andy Xie considers this not reliable. Plus, saving incentives have gone down.
- With excess liquidity, these moves to increase reserve requirements are not enough. The government actions are only reducing excess liquidity, not turning it around. The loan deposit ratio is 67%, and the deposit reserve ratio is less than 17%. This is not enough to turn around the excess liquidity.
- Also, there is hot money going to China, which will continue. China will have to raise interest rates to show that they’re serious about tightening.
Filed Under: China, Stock Gurus