Andy Xie: I’ll Tell You When Chinese Bubble Is About to Burst: Andy Xie
Commentary by Andy Xie
April 26 (Bloomberg) -- “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 the loss.”
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.
Free Lunch
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.
(Andy Xie is an independent economist based in Shanghai and was formerly Morgan Stanley’s chief economist for the Asia- Pacific region. The opinions expressed are his own.)
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To contact the writer of this column: Andy Xie at andyxie88@yahoo.com.hk
NYT: More American Expatriates Give Up Citizenship
By BRIAN KNOWLTON Published: April 25, 2010
WASHINGTON — Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship.
“What we have seen is a substantial change in mentality among the overseas community in the past two years,” said Jackie Bugnion, director of American Citizens Abroad, an advocacy group based in Geneva. “Before, no one would dare mention to other Americans that they were even thinking of renouncing their U.S. nationality. Now, it is an openly discussed issue.”
The Federal Register, the government publication that records such decisions, shows that 502 expatriates gave up their U.S. citizenship or permanent residency status in the last quarter of 2009. That is a tiny portion of the 5.2 million Americans estimated by the State Department to be living abroad.
Still, 502 was the largest quarterly figure in years, more than twice the total for all of 2008, and it looms larger, given how agonizing the decision can be. There were 235 renunciations in 2008 and 743 last year. Waiting periods to meet with consular officers to formalize renunciations have grown.
Anecdotally, frustrations over tax and banking questions, not political considerations, appear to be the main drivers of the surge. Expat advocates say that as it becomes more difficult for Americans to live and work abroad, it will become harder for American companies to compete.
American expats have long complained that the United States is the only industrialized country to tax citizens on income earned abroad, even when they are taxed in their country of residence, though they are allowed to exclude their first $91,400 in foreign-earned income.
One Swiss-based business executive, who spoke on the condition of anonymity because of sensitive family issues, said she weighed the decision for 10 years. She had lived abroad for years but had pleasant memories of service in the U.S. Marine Corps.
Yet the notion of double taxation — and of future tax obligations for her children, who will receive few U.S. services — finally pushed her to renounce, she said.
“I loved my time in the Marines, and the U.S. is still a great country,” she said. “But having lived here 20 years and having to pay and file while seeing other countries’ nationals not having to do that, I just think it’s grossly unfair.”
“It’s taxation without representation,” she added.
Stringent new banking regulations — aimed both at curbing tax evasion and, under the Patriot Act, preventing money from flowing to terrorist groups — have inadvertently made it harder for some expats to keep bank accounts in the United States and in some cases abroad.
Some U.S.-based banks have closed expats’ accounts because of difficulty in certifying that the holders still maintain U.S. addresses, as required by a Patriot Act provision.
“It seems the new anti-terrorist rules are having unintended effects,” Daniel Flynn, who lives in Belgium, wrote in a letter quoted by the Americans Abroad Caucus in the U.S. Congress in correspondence with the Treasury Department.
“I was born in San Francisco in 1939, served my country as an army officer from 1961 to 1963, have been paying U.S. income taxes for 57 years, since 1952, have continually maintained federal voting residence, and hold a valid American passport.”
Mr. Flynn had held an account with a U.S. bank for 44 years. Still, he wrote, “they said that the new anti-terrorism rules required them to close our account because of our address outside the U.S.”
Kathleen Rittenhouse, who lives in Canada, wrote that until she encountered a similar problem, “I did not know that the Patriot Act placed me in the same category as terrorists, arms dealers and money launderers.”
Andy Sundberg, another director of American Citizens Abroad, said, “These banks are closing our accounts as acts of prudent self-defense.” But the result, he said, is that expats have become “toxic citizens.”
The Americans Abroad Caucus, headed by Representative Carolyn B. Maloney, Democrat of New York, and Representative Joe Wilson, Republican of South Carolina, has made repeated entreaties to the Treasury Department.
In response, Treasury Secretary Timothy F. Geithner wrote Ms. Maloney on Feb. 24 that “nothing in U.S. financial law and regulation should make it impossible for Americans living abroad to access financial services here in the United States.”
But banks, Treasury officials note, are free to ignore that advice.
“That Americans living overseas are being denied banking services in U.S. banks, and increasingly in foreign banks, is unacceptable,” Ms. Maloney said in a letter Friday to leaders of the House Financial Services Committee, requesting a hearing on the question.
Mr. Wilson, joining her request, said that pleas from expats for relief “continue to come in at a startling rate.”
Relinquishing citizenship is relatively simple. The person must appear before a U.S. consular or diplomatic official in a foreign country and sign a renunciation oath. This does not allow a person to escape old tax bills or military obligations.
Now, expats’ representatives fear renunciations will become more common.
“It is a sad outcome,” Ms. Bugnion said, “but I personally feel that we are now seeing only the tip of the iceberg.”
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