“Europeans are not productive enough to defend their living standards”

Famous for his provocative views on international economics and China’s rise, Andy Xie is an independent economist who predicted the Asian bubble in 1997. Based in Shanghai, he is a former Morgan Stanley star chief Asia-Pacific analyst. We interviewed him for our summer interviews on China’s challenges, the eurodrama and his forecast for the future. For Mr. Xie, Wall Street bankers are viewed in China as “a bunch of corrupt money grabbers, just like Chinese government officials”. As for Europeans, they will have to change their minds and attitude in order to protect their current living standards.

andy xie 1Are China’s growth days over? Not if the economic structure is changed. China’s per capita income is $6,000 in 2012, compared to $30,000 for South Korea and Taiwan. China has all the characteristics to catch up with both. But the current model wastes capital through government-directed investment. Inefficiency is holding China back.

What will be the impact in the household sector? China’s household sector has declined in the economy because government has been collecting money through raising taxes and increasing property prices. Household disposable income is about 40% of GDP, the lowest in the world.

After the 2008 crisis, Beijing encouraged the banking system to force-feed (I’m quoting you here) the economy with credit. You’ve said this has brought bad consequences. Can it be fixed? How? China could cut taxes to increase it to 55%, like in other developing countries. If it happens, China’s economy will have a cycle of consumption led growth. Unfortunately, the government isn’t willing to do so yet.

In the West we often speak about the real estate bubble in China, but how big is it? The properties under construction are roughly worth 100% of GDP. Nothing like this has been seen before.


Let’s talk about the West now. Banks have lost a lot of credibility since the financial turmoil. What is the perception in China? Chinese leaders used to worship the Wall Street’s secrets in allocating capital to achieve prosperity. Not any more. Wall Street bankers are viewed as a bunch of corrupt money grabbers, nothing special, just like Chinese government officials.

Is Europe ahead or behind the curve? Do you think the euro is here to stay? Europe is trying to muddle through its crisis. Its steps are never enough to solve the crisis, merely kick the can down the road. Euro is a like a roach motel, difficult to get out.

What do you make of the ECB’s behaviour? ECB is not independent, it is beholden to so many governments. Ultimately, it cannot solve a political crisis with monetary policy alone. If it tries to underwrite all the risk by printing money, it will lead to massive inflation and euro devaluation. I think it is headed that way.

Some people think there is actually a political intention of creating a two-speed eurozone. What’s your take on that? Spain and Italy have to stay in euro. I doubt it is possible to kick them out. One speed euro is to fit Spain and Italy. Germany will have to change.

It’s been said that Southern European countries such as Spain are under speculative attacks. Can that be true? How can somebody increase the yield on Spanish debt if at all? Yes. When a country has high level of debt, speculative attack can create self-fulfilling catastrophe. Speculative attack merely accelerates the inevitable. Speculators are like scavengers looking for the nearly dead and speeding the process for a profit.

You’ve written that European governments have gone too far in guaranteeing living standards and that’s not competitive anymore. But for example the lack of a public health system in the US is less efficient and a bigger economic burden for the government. And in China the household sector needs to save more, which is bad for growth and consumption, because of the health care and education prices rising. What would be the ideal model then? European governments have severely distorted incentives to work and limited market competition. It results in a shrinking pie. Hence, no matter how good one’s intentions are, there isn’t enough to go around. When governments borrow to keep up the face, it eventually leads to a debt crisis like now. It is merely revealing the structural problems that the debts covered up. I’m afraid that European living standard will decline significantly in the coming years. Europeans don’t have the productivity to defend their living standards, I think. The end result is to cut living standards through inflation and euro devaluation.

About the Author

Ana Fuentes
Columnist for El País and a contributor to SER (Sociedad Española de Radiodifusión), was the first editor-in-chief of The Corner. Currently based in Madrid, she has been a correspondent in New York, Beijing and Paris for several international media outlets such as Prisa Radio, Radio Netherlands or CNN en español. Ana holds a degree in Journalism from the Complutense University in Madrid and the Sorbonne University in Paris, and a Master's in Journalism from Spanish newspaper El País.

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