Andy Xie on China's Multiple Bubbles

China's Foul Assets, Fouler Yet

...Powerful interest groups have paralyzed China's macro policy, with ominous long-term consequences. Local governments consider high land prices their lifeline. State-owned enterprises don't want interest rates to rise. Exporters are vehemently against currency appreciation.

...In the meantime, inflation continues to pick up momentum.

Unless the central government bites the bullet and makes choices, the economy might experience a disruptive adjustment in the foreseeable future.
 
The first key point is that local governments have become dependent on the property sector for revenue as profits from manufacturing decline and the need to spend increases. Attracting industry has been the main means of economic development and fiscal revenue for two decades. Coastal provinces grew rich by nurturing export-oriented industries. But those economics have changed in the past five years. Rising costs have sharply curtailed manufacturers' profits, and most local governments now offer subsidies to attract industries. The real revenue game has shifted to property.
 
Second, preferential lending treatment for state-owned enterprises has led to their rapid expansion. Most debt on the mainland is owed by state-owned enterprises. The debts of households and property developers are really payments to government. Keeping interest rates exceptionally low has become a national policy for protecting the state sector. Other considerations, such as inflation, have been suppressed.
 
Third, China's exporters are suffering from rising costs and weak global demand. They are vehemently opposed to currency appreciation. The new labor law, rising tax rates and tougher environmental standards are their other grievances. 

In times of economic volatility as some rich become poor
are some of the wealthy forced to fight to preserve the status quo
providing some underneath an opportunity to prosper?

George Hartzman

...Low wages and resource prices were the subsidies before. Now, resource prices are high and wages are rising. High land prices and low interest rates have become the pillars for the state sector, alleviating the burden on the export sector. High land prices and low interest rates are really taxes on the household sector. Essentially, Chinese people have made gains on wages but lost big on housing affordability and interest income...

The macro dilemma really reflects structural problems.
 
China's policies have travelled the path of least immediate resistance - monetary expansion and asset inflation. The main purpose behind asset inflation is that the government can tax it. It provides a place for people to chase their get-rich-quick dreams and is popular as long as the market goes up. It also offers insiders who have disproportionate influence to play the game at the expense of little people.
 
...The stock of residential properties, works in progress and land banks may be worth three times the gross domestic product... Their value was negligible seven years ago.

...the mainland has created a unique phenomenon of empty flats: I suspect the number is 10-20 million.
 
When China's bubble bursts, there will be considerable economic damage.

...the longer the market is distorted, the bigger the eventual payback.
 
Andy Xie
Caixin Online