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 The former Morgan Stanley economist is among the more moderate of
the bearish voices that have called the 'China crash' since the late
1990s. The more extreme doom-mongers have been forecasting
everything from a property meltdown and debt crisis to full-blown
economic recession and even political revolution.
Yet China has consistently defied the odds, projecting itself as a
single-party-led export powerhouse with absolute hold over its
financial system and a government with deep pockets. Investors have
been rewarded with a decade of double-digit economic growth and a
property market that has multiplied several times over the years.
But this year seems different. Rising funding costs, a more volatile
yuan currency, money market liquidity crises and companies
defaulting on bond payments, which is rare for China, all have
raised concerns that this could be China's Year of the Bear.
Will the bears finally be able to say "told you so"?
"It's going to be big, it's going to be historic, and probably going
to be this year," says Gordon Chang, a Chinese-American lawyer and
columnist who's been predicting a crash in China for the past 15
years or so.
Xie, who has a decent track record in predicting major twists and
turns in China's markets, is, however, mindful of how those who
queue to hear his talks are agnostic when it comes to forecasting
the definitive China crash. "They pay to listen to me, get scared,
and then go out and feel good again. It's entertainment," he says.
BUBBLES AND PERMA-BEARS
There are varying scales of China bearishness.
Moderate doubters, such as Xie, fret more about short-term asset
bubbles than about the country's long-term ability to reform and
evolve. Hedge fund manager Jim Chanos, who founded Kynikos
Associates LP, has made money from short selling Chinese commodity
stocks, while Aberdeen Asset Management fund managers have long been
'underweight' China due to concerns over the transparency and
maturity of businesses there.
To be fair, some short-sellers have enjoyed brief successes, such as
when the Shanghai property market fell 40 percent in 2005-06 and the
stock market <.SSEC> slumped in 2007-08.
Despite being challenged and marginalized, the die-hard pessimists
remain steadfast. These 'perma-bears' say China's export-driven,
investment-fuelled economy is inherently unstable, not to mention
the moral hazard wrought by a system where no one was allowed to
fail.
What keeps them believing?
Chang, the New York-based lawyer, published his book 'The Coming
Collapse of China' more than a dozen years ago. He says he just has
a deep-rooted belief that China can't rig the game forever. His was
a lonely bear voice in the late 1990s, but he remains convinced the
Chinese bubble will pop.
TIPPING POINT
The China bear drum beat has sounded stronger this year, with
slowing growth and evidence that private debt has climbed to twice
economic output — levels that triggered debt crises in Spain and
Ireland recently. Malaysia, Taiwan and Thailand are other
uncomfortable precedents.
China is at a tipping point, the bears argue, because President Xi
Jinping's administration is determined to rebalance the economy
towards consumption and away from investment — and that will bring a
sharp slowdown and debt defaults.
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Chang argues the modernization of China's economy in the three
decades since Mao Zedong's death disguises deep insolvency,
deflation and corruption problems that will ultimately bring about
its implosion. The crash, he says, would have come by now, but for
the massive stimulus China unleashed in 2008, when the world was in
the grip of a financial crisis.
Other China bears, such as hedge fund manager George Soros, who
successfully bet against the British pound in the early 1990s and
also made money from the U.S. subprime crisis, are ringing the alarm
bells, too. Soros recently wrote about China's "exponential debt
growth", warning that such borrowing cannot be sustained for much
longer than a couple of years.
Morgan Stanley analysts have been routinely bearish on China, and
warned last month it was at its 'Minsky moment' — the point, named
after economist Hyman Minsky in 1993, when a credit boom fuelled by
speculative funding messily unravels. Morgan Stanley warns this
unwind in China could trigger a global corporate earnings crisis.
DEBT TRIGGER
Xie, who was labeled an 'American parrot' by Chinese local media in
2008 for repeatedly predicting a stock market collapse, expects a
big crash in the property market. "In a year's time people will be
really upset, but they don't want to talk about it now," he said.
Michael Pettis, a professor at Peking University's Guanghua School
of Management and a noted blogger, predicts China's growth will slow
sharply to an average 3-4 percent in the decade to 2022. "We're no
longer including in our growth those losses which we failed to
recognize. So that reduces GDP to the correct rate and, as we begin
amortizing losses, growth reduces even further," he says.
Pettis acknowledges the risk that China's economy could hit a sudden
stop the moment it reaches its debt capacity — the total debt a
country can borrow without leading to financial difficulty. At the
same time, he expects Beijing will manage to slow the economy and
avoid bumping into that debt limit.
For now, it seems that a debt mountain estimated at more than $20
trillion, and the difficulty in predicting how China will claw its
way out, separate the bulls and the bears.
From Japan's debt-driven 'lost decade' in the 1990s to the more
recent euro zone crisis, the bears may have precedent on their side.
"Debt is always misunderstood, it's emotive and when there's a lot
of it, people assume it could all go horribly wrong. China certainly
meets that condition," said Tim Condon, Asia economist at ING. "What
makes it complicated is what is exactly the burning fuse here? The
deck view is that it's just a fuse, and could be very long."
(Editing by Ian Geoghegan)
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