The plenty more for stock optimists to be optimistic about, of course. One of the commonest (and laziest) tropes doing the rounds these days is that China’s growth engine will pull the rest of the world out of recession.

Anyone who thinks China can save the world from recession needs to read former Morgan Stanley analyst Andy Xie’s opinion on the matter. Andy reckons China is the next giant Ponzi scheme set to collapse. Andy predicted the bubbles in Japan, Southeast Asia, Silicon Valley and most recently in the US housing market. So when Andy speaks, we listen.

Chinese stock and property markets have bubbled up again. It was fueled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100% overvalued. The odds are that both will adjust in the fourth quarter. However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future. The bursting will happen when the US dollar becomes strong again. The catalyst could be serious inflation that forces the Fed to raise interest rate.

Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn’t enough liquidity to feed the beast.

We’ve already warned Notes readers that stimulus-fueled China is a tinderbox ready to catch fire. So when will the China bubble to burst? According to Andy, when the US dollar recovers:

It is not too hard to understand when the bubble would burst. When the dollar becomes strong again, liquidity could leave China sufficiently to pop the bubble. What’s occurring in China now is no different from what happened in other emerging markets before. Weak dollar always led to bubbles in emerging economies that were hot at the time. When the dollar turns around, the bubbles inevitably burst.