Dr Andy Xie wrote an opinion piece for SCMP on why he believes the bull market isn’t coming back just yet.
The markets are celebrating the pending agreement between China and the United States to end the trade war. This follows the US Federal Reserve signalling a pause in raising interest rates.
The euphoria is bringing the bulls out of hiding. Unfortunately, this is likely to be a dead cat bounce. A global slowdown is in full swing and with it, an earnings recession. Even if another major financial crisis could be averted, the debt binge of the past decade would take a long time to digest.
The change in the Fed’s policy posture is probably more important than a resolution to the trade war. Trump was raging that increased interest rates had crashed the market, and the falling market threatened to trigger another debt crisis.
The Fed backed down on plans to continue raising rates and unwinding quantitative easing. Its stated rationale for its changed stance is the slowdown overseas, which sounds like an excuse. In truth, its policy is self-contradictory.
If the bubble continues, another financial crisis, though delayed, is inevitable. If the aim is to achieve a soft landing – an orderly unwinding – it means having to resume raising interest rates when the market is stable in the second half of the year. And the market might crash again.
In China, there are domestic causes for the bear market. The trade war had an impact on sentiment and might have accelerated the market adjustment. The stock market bubble popped in 2015, and the market has not fully adjusted.
A new bull market could only start through significant structural reforms, which are quite unlikely. An earnings recession is on the way and will last a long time, driven by declining debt growth.
…China’s debt bubble is in more immediate trouble. In the first place, the country’s debt data is not accurate. A vast shadow banking system has developed since 2008. If we use the conservative debt numbers – from 150 per cent of GDP in 2008 to 250 per cent in 2018 – Chinese debt has grown by 177 trillion yuan (US$26 trillion).
Read the rest of the SCMP article here.
Dr 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.