Andy Xie is an independent Economist. In 2006 he left his job as Morgan Stanley’s chief Asia-Pacific economist under ‘interesting circumstances’. He is known for his strong and normally contrarian views, and has sucessfully called a number of bubbles over the past few decades, including the recent recession and the dotcom crash.
I’ve cut and paste a fantastic piece penned by Xie this week in which he discusses a friend’s maid’s rush into the Chinese real estate market. Enjoy!
“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
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?
The evidence in official-corruption cases no longer
involves cash stashed in refrigerators or starlet mistresses in
Versace clothing. The evidence is now apartments. One mid-level
official in Shanghai was caught with 24 of them.
China is in the throes of a vast property mania. First, let
me make it perfectly clear that calling China’s real-estate
market a “bubble” isn’t denying China’s development success.
As optimism is an essential ingredient in a bubble, economic
success is a necessary condition. Nor am I saying that prices
will drop tomorrow. A bubble evolves and bursts in its own time.
When it is about to burst, I’ll let you know.
Expectations of a Chinese currency revaluation are,
perhaps, the most important force inflating the bubble. First,
it plays to the latent human desire for a free lunch. You just
need to exchange your money for Chinese yuan. According to all
the experts on Wall Street, you can only gain. The money has
been gushing into China.
Second, the revaluation story has kept Chinese money inside
the country. The dollar has always been the safe-haven asset for
Chinese. This is why Chinese banks had a large dollar deposit
base. Of course, anybody who was somebody had dollars offshore.
Now all that money is back. More importantly, any income, legal
or otherwise, now stays in China.
Flats Beat Cash
Why would corrupt officials keep apartments rather than
cash? Well, according to Wall Street, the yuan is going to
appreciate. So holding dollars is out of the question. And why
hold Chinese cash when property prices are always going up? The
corruption money can be turbocharged in the real-estate market.
Only when they are caught do they understand the downside of
holding fixed assets.
The massive liquidity waves have prompted Chinese banks to
lend as much as possible. One Wall Street tradition adopted
quickly in China was bonus recipients signing company checks to
themselves. All you need is to report eye-popping quarterly
earnings. It is an easier game than on Wall Street: The Chinese
government keeps the lending spread wide by fixing both the
deposit and lending rates. You just have to lend. The earnings
will follow. Might the loans turn bad in three years? Well, I’m
not going to give back my bonuses, right?
For a bubble to last you need a force to hold it together
when it stumbles. Wall Street kept pumping out new natural or
synthetic products to turn debt into demand for assets. Local
governments play this role in China.
Future Profits Now
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.
When properties are sold, transaction and profit taxes kick
in. Developers pay more levies to the governments than they
earn. When developers finally book their earnings, they must put
it to work, as good Wall Street analysts would recommend, so
they buy land. As land prices are much higher, their measly
earnings aren’t enough, so they have to borrow. The governments
get all their earnings and debt repayments. Can you blame them
for boosting the market whenever it slips?
Land obsession is another force at work. China was a rural
economy not so long ago. The most important asset was always
land. “Be a government official and become rich” is a
millennium-old Chinese saying. It didn’t explain where the money
went. It always went into agricultural land. In cities, you only
see buildings, not paddy fields. But the buildings sit on land.
Now housemaids are in the market. Who else? Never
underestimate 1.3 billion people. In China, they say you should
take the shoeshine boy’s advice. Many would listen to him.
Welcome to China, the land of getting rich quick!