Andy Xie warns of China crash

SINGAPORE Mon Apr 30, 2007 8:09am EDT

A shareholder at a stock exchange market in southwest China's Sichuan province, March 26, 2007. Morgan Stanley former star economist Andy Xie warned of an imminent stock market crash in China -- but still hopes to raise money to invest in the country. REUTERS/Stringer

A shareholder at a stock exchange market in southwest China's Sichuan province, March 26, 2007. Morgan Stanley former star economist Andy Xie warned of an imminent stock market crash in China -- but still hopes to raise money to invest in the country.

Credit: Reuters/Stringer

SINGAPORE (Reuters) - Morgan Stanley former star economist Andy Xie warned of an imminent stock market crash in China -- but still hopes to raise money to invest in the country.

Xie, who attracted a wide following while he was at Morgan Stanley (MS.N) because of his often contrarian views on China's economy and stock markets, also warned that the global boom in equities would be over by 2008 and that this would coincide with a worldwide recession.

The recession would start from the United States and spiral down into Asia where exporters would be hit, Xie, 46, told Reuters in a telephone interview.

"I think it's going to be bust very soon," Xie said, adding that a combination of excess liquidity, rising inflation and rich valuations would result in a global crash soon.

"People will be surprised. When the end comes, it's going to be pretty bad," Xie added.

Despite his ultra-bearish view on the markets, Xie told Reuters that he plans to set up an "investment club" that would be open only to people he knows. The club would invest in unlisted firms, would have total funds of $200 to $300 million and would be focused solely on China.

"I'm going to be flexible -- mainly looking at early-stage companies that appeal to domestic demand," Xie said.

"I'm looking for backers who know me, so there's a trust element involved and that would make decisions much easier," he added. "I want to be backed by business people who can provide value-add. When they see somebody, or a story, they have an instinct that that's going to work."

Unlike other private equity funds, Xie said his club would also help provide management consultancy for the companies in which it invests.

CHINESE BUBBLE

Xie -- who worked at Morgan Stanley for nine years and spent five years as an economist with the World Bank -- resigned from the U.S. investment bank after an email with disparaging comments about Singapore's economic policy was leaked to the public.

His email was written shortly after the IMF/World Bank meetings in Singapore in September.

Xie declined to elaborate on his departure, but said he was already considering resigning from the bank before then.

He added that he would not join another firm again and does not rule out heading his own fund in future. He sees himself traveling around China, dispensing economic advice.

Earlier this month, Xie warned investors of an imminent meltdown in the red-hot China stock market in an article in Hong Kong's South China Morning Post (SCMP). His comments were published a day before a global sell-off on April 19, which was caused by fears of a rate hike in China.

Xie -- who has a doctorate in economics and a master's degree in civil engineering from the Massachusetts Institute of Technology -- said China was not doing enough to limit the country's frothy stock market. The benchmark Shanghai stock index .SSEC is up about 44 percent since the start of the year and set a new life high on Monday.

China's central bank announced on Sunday that it would lift reserve requirements by a further 0.5 percentage point, the fourth reserve hike this year, but Xie said this would not stem the "humungous" excess liquidity in the market.

Xie said the Chinese government understood the importance of limiting the bubble in the market, but was reluctant to implement more forceful measures, fearing a political backlash.

"College students are putting their tuition money into the market...stroke-stricken retirees get wheeled into branches of securities firms to trade," Xie said in his SCMP article.

"People are not paying attention to anything else," Xie told Reuters.