As I wrote here, China bear Andy Xie appeared to have changed his tune in a CNBC interview. Today he confirms that shift in a new column for Bloomberg-Chinese Property Bust Is Morphing Into a Slow Leak-in which he says Chinese real estate prices have peaked and will decline, but much more slowly than he expects. He seems to blame the government for ruining his “Crash Call”.
I am not sure how any economic pundit opining on China can be surprised by the role of the government, especially when the government has repeatedly said it is not interested in a large decline in property prices, just a moderating of their increase.
I know I know, it is crazy to think that Chinese policymakers can manage around market forces that must “inevitably” lead to a crash, as many of the China bears argue. Then again, maybe the bears don’t understand how China works. As I wrote a few months ago in Are There More China Bears Than Panda Bears?:
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 make 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…
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.
As for Andy Xie and his new call for a slow deflating instead of a crash, I recommend he listen to George Soros on whether or not there is a bubble in China:
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.
Andy Xie is a masterful self-promoter. But investors should be wondering if his economic forecasting abilities match his self-promotion talents.
There will always be long and short opportunities in China. The successful investors will likely be the good stock and sector pickers, not macro “gurus”.
Please tell me what you think in the comments.
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