China's Economy, from a Front-Row Perspective

Remember the smart kid in school who sat in the front row, raised his hand a lot and made the teacher nervous because he always had the right answer, even when the teacher did not? He might have been Andy Xie.

Xie's school days at MIT are long past. But as an economist, investment adviser, financial media columnist, blogger and cautious China cheerleader, he still functions with the spirit of the smartest kid in class. He's up front with analysis. He's not afraid to correct the powers that be. And he never runs out of things to say.

Xie's new book Double Dip: When the Bubble Bursts, I'll Tell You reflects this intellectual confidence, particularly in the forecasting arena. The theme – big trouble looming for China's bullet-train economy – is a Xie trademark. The book is based on the sorts of warnings about the dangers of Chinese stock market bubbles, western debt and insincere macroeconomic policy that are familiar to regular readers of his magazine columns and op-ed newspaper articles. His tone is often critical, sometimes bordering on mockery. Yet one senses that, deep inside, Xie is an everyman economist who always hopes for the best.

Xie is an independent economist in Shanghai not beholden to state-owned banks or global investment funds. He's enjoyed this freedom since 2006, when his front-row honesty (some would argue conspiracy theories) probably contributed to his departure from a prominent position in Hong Kong with Morgan Stanley's Asia team. These days, he works for a quieter outfit called Rosetta Stone Advisors, which means he can afford to spout off about Chinese government macroeconomic policies, unrealistic currency exchange rates, the futility of government stimuli, and bubble-pumping brokers.

Consider Xie's manner of replying to the Beijing government on a rebalancing that began after the global financial crisis in 2008. In the wake of the Lehman Brothers failure, Beijing leaders talked a lot about Chinese consumers who breathed confidence, regardless of U.S. conditions. The official line said stalwart confidence would provide wind for the sails of a smooth transition from an export- to a consumer-based economy, helping China comfortably sidestep the financial crisis pain wracking the West.

Xie didn't buy that line. Instead, he argued that low income levels in China were keeping consumption rates low, and that confidence alone could not jump-start a consumer society. Chengdu workers struggling to pay rent – even millions of them – would never replace a single cog in America's consumer machine.

In addition to wagging a common sense finger at Beijing, Xie is not afraid to challenge his peers in the financial world, particularly economists who ignore the forest for the trees. These included a pack of silly optimists who crowed about “green shoots” just months after the near-meltdown in 2008. He wrote that green shoots meant nothing when tangled vines of high leverage were choking major financial institutions in the western world.

As the book's title Double Dip suggests, Xie also likes to float big-picture predictions. He builds each case on real-life facts, statistics and moderate contrarianism. Sometimes he goes overboard, like the smart kid in class who runs ahead of the teacher. But anyone who dares challenge Xie's economic forecasting does so at great peril. He's famous in analyst circles for predicting the 1990s Asian Financial Crisis, for example, as well as the post-handover Hong Kong property market tumble and China's bout with deflation in the late 1990s. Several years ago, he accurately forecast what's now a snowballing labor problem in China.

At the core of the book, Xie argues that China's economic trends point to a major adjustment in the future. He calls the nation's high-priced property market a bubble waiting to burst, and explains in depth the phenomenon of bubble formation on China's unique stock markets. He sees stagflation on the horizon for China and a vulnerable global system plodding toward a double-dip downturn.

Xie also suggests a way out for China policymakers who don't want a dead end for the country's 32-year market reform project. He begins by arguing that ordinary Chinese are not reaping the benefits of the state-owned companies that dominate their economy, even though as taxpayers they technically own the companies. How to fix that? Xie suggests a sort of coupon privatization mechanism in which the government would print shares in state-owned enterprises and distribute these shares to citizens. But first, Xie says, China needs to create a legal structure that would guarantee fair treatment for citizen-shareholders of state enterprises. No doubt he's read all about East Europe's post-Soviet coupon privatization disasters.

Plenty of powerful interests in China pay attention to Xie, and his suggestions carry weight in policy realms. But he's not every official's best friend. To protect himself, therefore, Xie often wears a philosopher's hat. Philosophical reasoning is respected in China, even when the conclusions are not. So Xie trolls for the rationales behind facts and figures, weaving politics, social issues and history into his arguments. The chief editor at Xie's publisher Caixin Media, Wang Shuo, calls him a philosopher among Chinese economists who relies on an intellectual approach to problem-solving. It's hard for potential enemies to argue with that.

Besides, Xie is wildly popular at home and abroad. His conference lectures draw appreciative audiences, and hit counts soar when his columns are posted on Caixin websites. Xie likes to talk as well as write, which means he's a big hit at cocktail parties. Conversations in a room slowly taper off when Xie starts to speak. He's not a class clown or a show-off. But he does enjoy sharing opinions, which he often delivers at breakneck speed in English or Chinese. And of course, he doesn't mind the attention.

Some call Xie a market bear. The warnings in Double Dip, however, are not designed to trigger a stock sell-off. Nor does he advocate a turn-and-run approach to investment in China. In fact, as he has said many times when confronted by critics, Xie paints himself optimistic about the future of the Chinese economy. He really wants it to work.

At the same time, Xie refuses to downplay danger signs. He wants anyone who appreciates an intellectual and common sense approach to China's economic development to listen carefully and heed warnings. Double Dip readers will appreciate this prodding technique as well as his thinking process, even if they don't agree with his conclusions. Eventually, they'll learn the truth that dawns on every teacher who has a gifted child sitting in the front row: The kid is probably right.