Are There More China Bears Than Panda Bears?

There are only 2-3,000 Panda Bears remaining in the world. With today’s prediction by legendary investor Marc Faber that “China May ‘Crash’ in Next 9 to 12 Months“, hot on the heels of Jim Chanos, Andy Xie and many others, there may now be more China Bears than Panda Bears.

Zero Hedge makes an excellent point in its summary of Faber’s prediction:

The true contrarian play here would be that China will not moderate voluntarily until it is really too late and the events in the country are no longer under the control of the PBoC. Faber, Chanos, Hendry – they all appear to assume rationality will eventually prevail. We are skeptical.

In related news, China today announced that it has raised bank reserve ratios for the third time this year:

The latest move adds to a government crackdown on property speculation after record price increases in March and came on a holiday weekend, with Chinese markets shut today. Within an hour of the central bank announcement, Finance Minister Xie Xuren said that officials remained committed to expansionary policies to cement the nation’s recovery.

“Beijing still prefers to fine-tune credit conditions and the property market rather than using blunter instruments that impact the entire economy,” said Brian Jackson, a Hong Kong- based strategist at Royal Bank of Canada. The danger is that the approach “will not be enough to keep these price pressures under control, which would then force policy makers to tighten more aggressively later on.”

None of the bearish cases that I have read take into account politics, social stability and the overriding mission of the Communist Party to retain power. The bearish foreign fund managers, pundits and analysts may be making a classic mistake of viewing China through their financial models. But as we learned in the crash of 2008, most of those models are flawed, even when applied to “free markets”.

China may very well have bubbles in many sectors, but bubbles can last for a very long period, especially when you have an authoritarian government, a non-market economy, and a ruling party that took as one of its lessons after the collapse of the Soviet Union the need to deliver fast economic growth at all costs. Maybe that growth is inefficient, maybe it is wasteful, but that doesn’t not mean it has to end anytime soon. The Chinese government still has a lot of ammunition left to keep growth afloat, they are just as adept at marking bad assets to fantasy as Western banks and governments are, and they may very well believe that making the “correct” economic choices risks stability and possibly their political lives.

As Willy Lam wrote in a recent essay for the Jamestown Foundation:

With the 18th Party Congress little more than two years away, PBSC members and other senior cadres are preoccupied with sustaining socio-political stability—and paving the way for the elevation of faction affiliates into the new Central Committee and Politburo. These conditions seem to militate against liberalization, which is seen as disruptive and destabilizing…For the foreseeable future, what party ideologues call the “leitmotif of the times” will likely remain, boosting the socialist orthodoxy in conjunction with beefing up the security apparatus.

Readers likely remember that the stock market already crashed in 2007-08, from over 6000 to 1700, and that real estate prices in major cities dropped 20-30% in 2008 after the government took measures reduce liquidity and then the financial crisis hit. The world didn’t end here.

Maybe this time is different and the China Bears are right, and have enough money to stay solvent. Or maybe China Bears will learn that most Western observers of China consistently underestimate the resilience and longevity of the government and this very hard-to-model, very messy creation officially known in China as Socialism with Chinese Characteristics.

It is possible we will eventually see China Bears higher up on the endangered species list than Panda Bears.

UPDATE1: I neglected to include this relevant quote by George Soros in an interview he gave to Caixin in February:

People see bubbles everywhere. Again, there is no question the financial stimulus has pushed up asset prices. Whether that is a bubble or not actually depends on whether it’s going to be a hard landing or a soft landing. If it is a soft landing, then it is not a bubble. If it is hard landing, it will be a bubble. We’ll only know if it’s a bubble or not later.

Please tell me what you think in the comments.

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25 thoughts on “Are There More China Bears Than Panda Bears?

  1. It’s impossible to tell the timing of the end of China’s bubble, but it’s also hard to deny that their isn’t a bubble there.. Almost everyone agrees that it’s a bubble or that it’s expensive, just like how internet bulls recognized that the dot-com stocks were expensive.
    You may be right that the China bears are the ones that will collapse(instead of China), but there’s still a bubble in China. The longer the government takes to tackle the issue, it’s social-political-economic impact will become that much more severe.

  2. It's impossible to tell the timing of the end of China's bubble, but it's also hard to deny that their isn't a bubble there.. Almost everyone agrees that it's a bubble or that it's expensive, just like how internet bulls recognized that the dot-com stocks were expensive.
    You may be right that the China bears are the ones that will collapse(instead of China), but there's still a bubble in China. The longer the government takes to tackle the issue, it's social-political-economic impact will become that much more severe.

  3. Let’s face it, there is no rational logic in China!

    It remains inscrutable as ever, in its 5000 years of history, it is all about POWER of the empire, or the emperor himself. In this case, the legitimacy of CCP to rule forever!

    People are traditionally obedient sheep (??????), unless the situation is so unbearable, i.e. no food and shelter, and people are being slaughtered. People have no incentives and urges to revolt as the “Happy Index” shooting sky high in the country.

    Today, people are given unprecedented freedom to make money either by hard working honestly, or sharpen their Machiavellian behavior to make money by cheating, faking, pirating, scamming and stealing, as long as not to challenge CCP’s legitimacy to rule. In the process, everyone is happy. People become wealthier than before, party bosses and cronies loot as much as possible. The government keeps on patching up holes of NPL by learning from the Wall Street bankers, second generation crony economists are as savvy as Soros, Chanos, and Rogers except for being dirtier and far less ethical.

    The Dickensian primitive capitalism with Chinese communist characteristics still has a long way to go. Everyone, including CCP and cronies know this is unsustainable, but the musical chair still cranks out the happy tune. Before the music stops, top party bosses and cronies, and their loots will be out of the country already.

    Using the dream of western wishful thinking of “globalization”, the CCP has successfully become a suicidal bomber, whose only wish is CCP to rule forever, bundling up with the west. Any wrong move of the west would trigger the bomb, as the timer ticking mercilessly.

    Chanos is wise to bet short on the commodity supply chain and currencies outside of China should this bomb explode. He is not shorting China. At the end of the day, there will be more Chinese crawl out of the world economic ruin, and thrive more thereafter.

    When will the bomb explode? No one knows. However, the CCP regime could be accidentally toppled by party chiefs’ army of disgruntled mistresses out of mutual jealousy and not having enough money to spend.

  4. Let's face it, there is no rational logic in China!

    It remains inscrutable as ever, in its 5000 years of history, it is all about POWER of the empire, or the emperor himself. In this case, the legitimacy of CCP to rule forever!

    People are traditionally obedient sheep (??????), unless the situation is so unbearable, i.e. no food and shelter, and people are being slaughtered. People have no incentives and urges to revolt as the “Happy Index” shooting sky high in the country.

    Today, people are given unprecedented freedom to make money either by hard working honestly, or sharpen their Machiavellian behavior to make money by cheating, faking, pirating, scamming and stealing, as long as not to challenge CCP’s legitimacy to rule. In the process, everyone is happy. People become wealthier than before, party bosses and cronies loot as much as possible. The government keeps on patching up holes of NPL by learning from the Wall Street bankers, second generation crony economists are as savvy as Soros, Chanos, and Rogers except for being dirtier and far less ethical.

    The Dickensian primitive capitalism with Chinese communist characteristics still has a long way to go. Everyone, including CCP and cronies know this is unsustainable, but the musical chair still cranks out the happy tune. Before the music stops, top party bosses and cronies, and their loots will be out of the country already.

    Using the dream of western wishful thinking of “globalization”, the CCP has successfully become a suicidal bomber, whose only wish is CCP to rule forever, bundling up with the west. Any wrong move of the west would trigger the bomb, as the timer ticking mercilessly.

    Chanos is wise to bet short on the commodity supply chain and currencies outside of China should this bomb explode. He is not shorting China. At the end of the day, there will be more Chinese crawl out of the world economic ruin, and thrive more thereafter.

    When will the bomb explode? No one knows. However, the CCP regime could be accidentally toppled by party chiefs’ army of disgruntled mistresses out of mutual jealousy and not having enough money to spend.

  5. I’m interested in seeing how Beijing’s policies, based on exploitation of natural resources/commodities ends. Aside from a labor force which, until recently, was cheap, China’s reforms since 1979 are based on the availability and exploitation of natural resources and exports to the developed world. Now, the Chinese government’s plans to dominate new energy are grounded in control of rare minerals, most of which are in Inner Mongolia.

    The big question though, is what happens after these limited natural resources are fully exploited? We are nearing the end of what this planet has to offer, yet the Chinese government and world have not thought this through. This suggests to me that there is only one alternative: a crash in human population until a new equilibrium is reached with nature.

  6. I'm interested in seeing how Beijing's policies, based on exploitation of natural resources/commodities ends. Aside from a labor force which, until recently, was cheap, China's reforms since 1979 are based on the availability and exploitation of natural resources and exports to the developed world. Now, the Chinese government's plans to dominate new energy are grounded in control of rare minerals, most of which are in Inner Mongolia.

    The big question though, is what happens after these limited natural resources are fully exploited? We are nearing the end of what this planet has to offer, yet the Chinese government and world have not thought this through. This suggests to me that there is only one alternative: a crash in human population until a new equilibrium is reached with nature.

  7. Time and again, I have been really amazed and impressed by the force and speed that the Chinese government can execute on when it commits to do something. At the end of 2008 when China decided to put together a stimulus package? The size of the package as percentage of gdp was much bigger than the US. The package was felt in the economy almost over night while the US was still debating it’s stimulus package in congress. Also back in 2007, when China decided to cool the housing market and the stock market. Both markets fell inline quickly as if someone just flipped a switch.

    It is virtually certain that when China decides to pop bubbles, bubbles will pop. In deed, Chinese regulators have a much better record of controlling asset bubble than the US Fed in recent history. This time, the government is clearly committed to reining in the housing bubble. From what I read, the affect is already visible across various tier 1 cities. Because of the low leverage of the Chinese consumers, the real estate bubble is potentially dangerous but not yet significantly dangerous to the Chinese economy. China has not past the point of no return like the US’s real estate market was in 2007. Furthermore, the financial crisis is a lesson not lost on the Chinese regulators. As the government’s current effort plays out over time, my bet is the real estate bubble will gradually deflate with some but not too much drama in the economy (due to low leverage). Probably by the end of this year or early next, there will be a lot less chatter about Chinese real estate bubble.

    Currently, there is no bubble in the Chinese stock market overall. However, it has and will suffer collateral damages from real estate adjustment. However there will be no mortal wounds since overall economy will continue to perform well.

    The only good investment option for Chinese savers is the stock market. Inflation is a looming threat for savers. US is not likely to raise rate too quickly and China won’t stray too far. As such, bank deposits and bonds rates will stay low. Real estate will precipitously fall in value. On the other hand, the stock market is reasonably priced (PE of 26 for an economy growing at 10% is fair). Money is likely to get funneled into the stock market. The stock market this year will be flat to slightly up as constrained by the adjustments in real estate. This is a setup for the stock market to do much better in 2011.

  8. Time and again, I have been really amazed and impressed by the force and speed that the Chinese government can execute on when it commits to do something. At the end of 2008 when China decided to put together a stimulus package? The size of the package as percentage of gdp was much bigger than the US. The package was felt in the economy almost over night while the US was still debating it's stimulus package in congress. Also back in 2007, when China decided to cool the housing market and the stock market. Both markets fell inline quickly as if someone just flipped a switch.

    It is virtually certain that when China decides to pop bubbles, bubbles will pop. In deed, Chinese regulators have a much better record of controlling asset bubble than the US Fed in recent history. This time, the government is clearly committed to reining in the housing bubble. From what I read, the affect is already visible across various tier 1 cities. Because of the low leverage of the Chinese consumers, the real estate bubble is potentially dangerous but not yet significantly dangerous to the Chinese economy. China has not past the point of no return like the US's real estate market was in 2007. Furthermore, the financial crisis is a lesson not lost on the Chinese regulators. As the government's current effort plays out over time, my bet is the real estate bubble will gradually deflate with some but not too much drama in the economy (due to low leverage). Probably by the end of this year or early next, there will be a lot less chatter about Chinese real estate bubble.

    Currently, there is no bubble in the Chinese stock market overall. However, it has and will suffer collateral damages from real estate adjustment. However there will be no mortal wounds since overall economy will continue to perform well.

    The only good investment option for Chinese savers is the stock market. Inflation is a looming threat for savers. US is not likely to raise rate too quickly and China won't stray too far. As such, bank deposits and bonds rates will stay low. Real estate will precipitously fall in value. On the other hand, the stock market is reasonably priced (PE of 26 for an economy growing at 10% is fair). Money is likely to get funneled into the stock market. The stock market this year will be flat to slightly up as constrained by the adjustments in real estate. This is a setup for the stock market to do much better in 2011.

  9. memory feeds imagination « the scenic route

  10. We heard the same arguments relentlessly, that government control of the economy would make everything different this time and was far superior to western capitalism, just prior to Japan’s self immolaton and subsequent two decade smoldering swoon. Remember the now quaint ideas regarding the infallibility of and need for the USA to have it’s own MITI?
    It’s never “different this time”. Bad policy is always bad policy; the only question is how long can different countries keep adding the spinning plates of governmental economic planning and manipulation until they all come crashing down.

    • I don’t disagree. I also don’t see why Europe or the US wouldn’t crash
      before China. China has a lot more powder left, especially when compared to
      Europe

      I am not saying things are different this time, just that this time China
      can string things along a lot longer than most people, including western
      pundits using their flawed models. expect.

      • Agreed, and since Europe and the US are pursuing policies at least as anti free market and idiotic as China they may very well crash first. However to a country like China, still strongly dependent on the economic health of the rest of the world, our idiotic policies, if I could extend my spinning plate metaphor a bit, are like requiring China to keep adding plates, but now they have to do it on a unicycle.
        And it hardly gives anyone comfort as to whose plates dropped first when they’re all smashed to bits in the same pile.

  11. We heard the same arguments relentlessly, that government control of the economy would make everything different this time and was far superior to western capitalism, just prior to Japan's self immolaton and subsequent two decade smoldering swoon. Remember the now quaint ideas regarding the infallibility of and need for the USA to have it's own MITI?
    It's never “different this time”. Bad policy is always bad policy; the only question is how long can different countries keep adding the spinning plates of governmental economic planning and manipulation until they all come crashing down.

  12. I don't disagree. I also don't see why Europe or the US wouldn't crash
    before China. China has a lot more powder left, especially when compared to
    Europe

    I am not saying things are different this time, just that this time China
    can string things along a lot longer than most people, including western
    pundits using their flawed models. expect.

  13. Agreed, and since Europe and the US are pursuing policies at least as anti free market and idiotic as China they may very well crash first. However to a country like China, still strongly dependent on the economic health of the rest of the world, our idiotic policies, if I could extend my spinning plate metaphor a bit, are like requiring China to keep adding plates, but now they have to do it on a unicycle.
    And it hardly gives anyone comfort as to whose plates dropped first when they're all smashed to bits in the same pile.

  14. Barry Naughton-Post-Crisis Economic Dilemmas of China Leadership | Sinocism

  15. Credit Suisse Analysis Of Likely Impact If China Imposes A Residential Property Tax | Sinocism

  16. Arthur Kroeber And Marc Faber Debate The "China Bubble" | Sinocism

  17. Great article Bill. Very good to point out the last decade and all premonitions were wrong. Even Andy Xie has reduced his expectation on a crash due to Government Policies. I’m still quite uncertain on how the future will play out, I am torn between what I seem to think are two sides. It appears that Economists and Geopolitics enable two different viewpoints. Economists in general believe that there is still growth for several decades in china in regards to urbanization, ie. tier two cities.
    The second group i’ve been following state the fundamentals of the political situation of China. Apparently China is very unstable politically as we see the surging separatists, and growing self awareness of the peasant population, which inadvertently makes up about 1 billion people. The divide between the have and have nots have left the government with no choice but to enact draconian media/censorship policies in order to keep the country together. Its expected that there should be major changes to the political system and policies in the next decade as we see China trying to keep its country together. I believe China’s major challenge will be just that, in finding ways to quell the divide.

    However regarding crashes. Most of the times it seems crashes occur without warning. If there are enough people to raise the awareness of a crash and becomes somewhat common acceptance, it is usually postponed and thought to be adverted. Some of the problems that are arising right now of course are the influx of fixed asset investments and funding of it by loans which will never be paid back. If we could predict a crash, then I guess that would be an easy way to retire rich.

    What is for certain is that it’s become more difficult to find the right opportunities to invest within China. Too many investors with too few investments that are worthwhile. Perhaps its almost time to reinvest into Europe and US.

  18. Great article Bill. Very good to point out the last decade and all premonitions were wrong. Even Andy Xie has reduced his expectation on a crash due to Government Policies. I’m still quite uncertain on how the future will play out, I am torn between what I seem to think are two sides. It appears that Economists and Geopolitics enable two different viewpoints. Economists in general believe that there is still growth for several decades in china in regards to urbanization, ie. tier two cities.
    The second group i’ve been following state the fundamentals of the political situation of China. Apparently China is very unstable politically as we see the surging separatists, and growing self awareness of the peasant population, which inadvertently makes up about 1 billion people. The divide between the have and have nots have left the government with no choice but to enact draconian media/censorship policies in order to keep the country together. Its expected that there should be major changes to the political system and policies in the next decade as we see China trying to keep its country together. I believe China’s major challenge will be just that, in finding ways to quell the divide.

    However regarding crashes. Most of the times it seems crashes occur without warning. If there are enough people to raise the awareness of a crash and becomes somewhat common acceptance, it is usually postponed and thought to be adverted. Some of the problems that are arising right now of course are the influx of fixed asset investments and funding of it by loans which will never be paid back. If we could predict a crash, then I guess that would be an easy way to retire rich.

    What is for certain is that it’s become more difficult to find the right opportunities to invest within China. Too many investors with too few investments that are worthwhile. Perhaps its almost time to reinvest into Europe and US.

  19. Why China Bears Will Never Die - Gady Epstein - Beijing Dispatch - Forbes

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