Andy Xie: Back to Earth

Andy Xie, board member of Rosetta Stone Advisors Limited, wirtes in the Caijing Magazine:

With the Olympics over, it is time for China to face some unprecedented challenges including lower foreign demand, rising costs at home, and liquidity.

No other country has spent even close to the money China has on the Olympics. But with the largest domestic gold haul in the nation’s history, Michael Phelps and Usain Bolt, all that money seems worth it.  That China could spend that kind of money on the Games is due to its economic successes in the past three decades. Of course, Deng Xiaoping’s ‘Reform and Opening Up’ policy led the country down the path of success. That policy should have received the shiniest gold medal at the games.

The Olympic Party is over. We must come back to real world again, which can be unpleasant. China’s economy is facing unprecedented challenges, though most have nothing to do with the Olympics. First, for the first time in three decades, the economies of Europe, Japan, and the U.S. may be contracting simultaneously. It is putting severe downward pressure on China’s exports. Second, China’s own assets bubbles, fueled by hot money (partly due to optimism related to the Olympics), have burst. Many businesses and local governments have over-expanded on bubble-related revenues or borrowings. They are facing a liquidity crunch as asset prices decline. Third and more fundamentally, rising production costs are casting doubts on China’s low-cost expansion strategy.

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