Is China Headed For a 1929 Style Depression?

Courting highly divided and vociferous blowback, Shanghai-based economist and well-known whistle-blower, Andy Xie, vocalized an unwelcomed viewpoint last week. 

He clearly stated that China’s economy might be unsustainable in the possible near future.

Xie has never been afraid of being accused of Cassandra-like behavior on the world stage of financial markets, and regarding major geopolitical players like China. 

Is this a particular hobby horse of his, or is there merit in the fomenting accusations that he has recently made?

It is necessary to look back a bit at the credentials of the man who feels no compunction in bringing sleepless nights to market traders and analysts around the world. 

Why his latest declaration is being given any credence at all is fundamental to understanding the concerns that are felt over the world right now.

Although Xie is an independently based economy commentator now, in the past, he was one of the leading Asia-Pacific economists at Morgan Stanley until he left precipitously in 2006. 

The reason for the rapid exit was his inflammatory statement that was committed to an internal email.

In it, he wrote that Singapore was involved the money laundering hub for Indonesia. 

He further stated in the email that the ASEAN (Association of Southeastern Asian Nations) was not satisfied. 

It was perceived as inflammatory enough to warrant some exit.

However undiplomatic some of his comments might be, Xie’s credentials come highly respected. 

Graduating from MIT (Massachusetts Institute of Technology) with a Masters in civil engineering and then proceeding on to a Ph.D. in Economics at the same institution. 

He began working for the IMF (International Monetary Fund) in 1990 where he specialized in South East Asian economics.

He moved to Morgan Stanley in 1997 and joined as a Managing Director.

Currently based in Shanghai as an independent economist, he uses his platform from the center of the Asian southeastern corner of the world, to launch prophecies regarding the viability of the Chinese economy. 

Below are some of the reasons why he is projecting a crash.

As can be seen in the graph below China has the second largest economy in the world:

The units used for comparison purposes are in US dollars.

And as seen from looking at Andy Xie’s credentials he is uniquely positioned to be able to comment with circumspection on financial matters about this particular area of the world. 

The burning question is whether he uses this position of influence to make well-considered statements – or does he court too much attention and notoriety with inflammatory anti-Asian investment sound bites?

• In his Asian investment bubble warnings, Xie makes two points:
• His predicted Asian market collapse will not be similar to the currency crisis in Asia 1997.
• It will not follow in the same course as the massive US market plummet of 2008.
• From Andy Xie’s latest statements, he predicts a market collapse tracking the same market behavior as the decline acceleration experienced in the US that lead to the Great Depression era of the 1930’s.
• The reasons he gives for making these statements are variously detailed below and follow the trends that drive to the market resembling the pre-Great Depression profile of the US.
• China’s rapid credit expansion as the country’s populace demand a better standard of living on credit and lending increased apace.
• Loose government monetary policies.
• Overconfidence buoyed by past performance that asset prices will stay almost continually bullish.
• Out of control speculation without enough monitoring.

When looking at these indicators, it is easy to mark the resemblance between this pattern of behavior and the ones that signified in the 1930’s. 

But would China be crippled by this similarly to the outcome of the Great Depression?

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Almost half of China’s current debt is subsidizing real estate prices.  

There is a significant amount leveraged against the stock market either.

These conditions are tried and tested methods of setting the market on a course to an over correction. 

The equivalent of a system overload and failure.

It is clear to see in the graph below that the Chinese markets are mirror imaging the trends of other countries that displayed a similar flippant disregard for over corrections:

It is obvious from the graph below that it remains a mystery as to why Andy Xie is being viewed as a lone voice in the wilderness instead of a reasonable and competent person able to read the signs.

It is safe to say that Xie’s statements are founded in empirical evidence.

Anxiety Is Expected- Will Caution Follow?

The Chinese government is apparently providing many forms of cheaper financing that have allowed uncontrolled speculation. 

Xie’s believes the writing is on the wall and a crisis imminent.

With all his experience and a keen sense of accurate monitoring, unafraid criticism and proven ability to sense the impending death knell of artificially, Xie has sought notoriety via his viewpoints but also has seen his opinions vindicated time and time again. 

This is an enviable track record that dissipates his predilection towards sensationalism.

Looking more into his background, Xie has been able to see both an eastern and western viewpoint, so he is globally respected as being of Chinese heritage but experiencing the best of western education and vision.

The Chinese government has been happy to stigmatize him as a westernized corrupt American spy. 

They have seen his past predictions, such as the one made in 2007, as an attempt to disrupt the harmony of the Shanghai market positivity. 

The Chinese representatives have so far remained tight-lipped and resolutely without comment about the latest statements issued by Andy Xie.

It remains to see if any reports will be issued by the Chinese government or anyone in a position of influence regarding the possible trepidation and fallout from these remarks that are on record at present. 

To introduce the following graph, the difference between the Chinese currencies and the three stock exchanges that service the country’s needs will be briefly touched.

The two currency terms in current use in China are the yuan and the renminbi. 

The renminbi is the People’s Republic of China’s official currency. 

Its literal translation is “people’s money”.

 The yuan is the unit under which all renminbi transactions are conducted and denominated. 

The yuan is further divided into smaller denominations. 

But all money is collectively called renminbi.

There are three stock exchanges in China. 

There is the Shanghai Stock Exchange (SSE), the Hong Kong Stock Exchange (HKSE) and the Shenzhen Stock Exchange in the province of Shenzhen (SZSE). 

This is average considering the size of China and the fact that the entire country has just one-time zone.

Being able to see at a glance by looking at the graph of the US dollar to Yuan exchange rate, the yuan has shown a slow decline against the dollar over the last ten years. 

The United States has been on record in the past for having an issue with China deliberately devaluing its currency to undercut trade prices against The U.S.

Whether all these factors emphasize the predictions from Xie that the Chinese markets are overdue for a massive correction are yet to be seen. 

The influence that he uses to wield criticism is usually voiced via the respected publication The South China Morning Post for whom he writes regular content.

In this seat, he uses it to express grave concerns that China has constructed a fragile economic structure that could collapse at any minute. 

He goes on further to predict that this will have massive global repercussions as the domino effect will ripple throughout all markets. 

He stops short of saying that the Chinese market’s unsustainability is like cancer.

That Andy Xie is a respected economist and sound voice of reason goes without saying. 

He is consistently accurate when it comes to forecasts about the economic issues in China. 

His abilities were tested when he predicted the market slump that occurred in October 2007.

One is unsure whether the statement Xie made in the run up to the events that happened on October 19, 2007, accurately foresaw the event or caused it, is open to debate.

Many other hedge fund managers and market experts have followed up with similar cautions regarding the markets trending towards a bearish fall – but Xie has always stood out from the pack by coming first with his prognostications.

He has stayed pessimistic about the validity of the emerging economic rise of China for over a decade now.

He claims that the infrastructure of the country does not stand up to scrutiny. 

Inside analysts, that tend towards a brighter outlook claim that China is always going to experience a certain amount of minor setbacks as it is the new kid on the block as far as vibrant economies go.

The artificiality of China’s economy is stressed by Xie. 

He reckons that China grew too fast, and the reason it has not hit a wall yet is that the government is continuously intervening to buoy up the problems inherent in the issues.

Did The Brexit Fall Expose A Fault?

Investors hurried to sell out of higher risk assets after Britain’s surprise exit from the European Union, also known as the brexit.

This brought concerns about the continued market optimism, and these were brought to attention by Xie. 

The markets have somewhat recovered from the flight and fright response, but it gave many investors a pause for thought.

Many market analysts say that a slight contraction, after the rapid expansion of the Chinese market, is to be expected. 

The Chinese GDP (Gross Domestic Product) showed just a 6.9% rise in 2015 – its slowest growth since emerging onto the global arena. 

This was under the GDP that was predicted and expected.

Estimates for this year have been set at a healthy 7% in Beijing. 

Authorities in the U.S. have estimated a cautious 6.4% to 6.6%, however. 

Chinese exports have gone down globally too. 

This will be linked to a general slowdown as the government has been forced to devalue the Yuan to inflate the economy again.

As China has endeavored to raise the general standard of living across the country, the population has been given access to credit on a much larger scale. 

Loans to nonfinancial based companies went over the $22 trillion line. 

This is viewed as a huge burden as it is almost twice as large as China’s GDP.

The top heavy private and public debt have led some financial commentators to caution that the Chinese markets and spending are foreshadowing the blind optimism that the US markets displayed in the crash that happened in 2008. 

The thoughts that it can somehow sidestep or avert the same results are not fortuitous.

The blind faith or pig-headed-outlook of the controllers of this untenable situation are in part, supported by the Chinese government’s eagerness to stand at the front of all financial policy regarding the economy.

The Politics Of China Running Counter To Positive Change

The political adherence in China to a communist regime sits uncomfortably alongside the capitalist ideals of the free market enterprise.

The Chinese National Party was ousted in 1949 after it had falsely inflated the economy that led to out of control inflation. 

This unpopular situation was utilized by the Communist Party to gain power. 

Not realizing that history is sometimes cyclical, the same scenario is being played out now. 

This time, it is on the global stage where people like Andy Xie have a voice and a platform from which they can express concerns.

Sadly, none of Andy Xie’s predictions reach the people in China. 

He has no outlet to reach a ground level where the Chinese are happily celebrating their country’s continued prosperity. 

This Damocles’ sword may not hang for much longer.