Dr Andy Xie: How property-hungry Chinese millennials and shadow banking could fuel a financial crisis

Dr Andy Xie

Millennials in China are borrowing heavily to invest in property, counting on the government to keep property prices buoyant. However, the rise of shadow banking means the government lacks the levers it has historically pulled to prevent a debt crisis. Dr Andy Xie worries that these trends will fuel a financial crisis.

One critical element of China’s financial stability is state ownership of the banking system. When asset markets experience downturns, the banking system can postpone debt servicing and keep borrowers from going bankrupt. Hence, debtors usually have a chance to wait for asset prices to recover.

The rise of the shadow banking system is weakening this factor. The 2015 stock market crash was largely prompted by shadow banking firms liquidating their positions. The government couldn’t control a fragmented shadow banking system.

The shadow banking system has been growing in importance. Down payment financing, for example, is an important driver of the property market. Given the extreme property price-to-income ratio, similar to what Japan saw during its bubble heydays, down payment financing is becoming important for keeping demand up.

As banks hold the collateral, when push comes to shove, could borrowers simply stiff shadow lenders? When the market is on the upswing, this issue is not pressing. The debt payment can be securitised as the additional capital value provides comfort to the lenders. The trouble starts during a long-term market downturn.


There are some early signs that the shadow banking system is the chink in the armour of the state-owned financial system. The leverage-fuelled lending for stock market speculation in 2015 was one example. The latest are the bankruptcies of residential rental operators.

These entities rent properties from owners and re-lease them to end users, often at a loss. They keep cash flow positive by borrowing from shadow banks against the rental income. This is essentially a Ponzi scheme. They are now going bust in droves. The impact on the shadow banking system is yet to fully land.

The third party in this scheme are usually millennials. They are big believers in “clever” schemes that defy conventional logic. Because they have grown up during a prolonged period of asset inflation, they believe in debt-financed speculation. Even though the stock market crash in 2015 taught them a lesson, apparently the lesson wasn’t painful enough. All sorts of Ponzi schemes have mushroomed since.

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Andy XieDr Andy Xie 謝國忠 is a renowned Chinese economist based in Shanghai who has been named one of the “50 Most Influential Persons in Finance” by Bloomberg.

Andy Xie’s skill and has been tried and tested through the years. He is one of the few economists who has accurately predicted economic bubbles including the 1997 Asian Financial Crisis and the more recent subprime meltdown in the United States.

He joined Morgan Stanley in 1997 and was Managing Director and Head of the firm’s Asia/Pacific economics team until 2006. Before that, Andy spent two years with Macquarie Bank in Singapore an associate director in corporate finance and  five years as an economist with the World Bank. Dr Andy Xie is currently a director of Rosetta Stone Advisors.

Dr Xie earned a PhD in economics in 1990 and an MS in civil engineering in 1987 from the Massachusetts Institute of Technology.

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