A ‘China bear’ loses his bile

In recent months, the growls from ‘China bear’ economists and money managers calling time on China’s “property bubble” and prophesying a colossal crash arising from excessive local government debt and a banking crisis had become deafeningly loud.

But it appears that at least one ‘China bear’ is slowly dialling back some of his grim outlook about an imminent property crash. In his most recent column for Bloomberg, independent economist Andy Xie, who had — even until a few weeks ago —  been flagging the risk of a “crash”, sounds a lot less apocalyptic.

Xie, who was formerly Morgan Stanley’s chief economist for the Asia-Pacific region, acknowledged in his column that “recent developments” had changed his mind about the manner in which China’s property market would evolve.

“Previously, I thought… the bubble would pop with a big bang in the second half of 2011 or in 2012,” Xie wrote. This is because he believed the Chinese government would relax its credit-tightening policies in the fourth quarter of 2010, “leading to another surge in property prices.”

“I thought the current bubble, fuelled by rapid monetary expansion and expectations of a stronger yuan since the beginning of 2007, would go the same way” as earlier ones, Xie added. But “this bubble may not end suddenly, but with a slow leak.”

Economy-watchers who had long been tracking —- and hanging on to —- Xie’s words as indicative of a coming crash in China were quick to detect the change in his tone. Former finance executive Edward Harrison, founder of Credit Writedowns, noted that “Xie is much less bearish on the Chinese housing market.”
Judging from the Bloomberg article, it appeared to Harrison that

“Xie has not recanted entirely: he is still bearish on the Chinese property market… He just expects the timing of the collapse to be different and the effect on the real economy to be less severe.”
What induced the change of mind for Xie was the fact that the Chinese government is not relaxing credit restrictions imposed earlier on second and third mortgages. “As most potential buyers fall into the restricted categories and depend on credit, the market can’t go up another level to release all the animal spirits,” he wrote.

In addition, he noted, liquidity is tightening. “The yuan story has been sort of like a striptease show: after waiting for years without seeing the real thing, hedge funds are fed up and don’t want to hang around anymore.” And although US Treasury Secretary Timothy Geithner “is howling again” about China’s undervalued currency, the market isn’t paying much attention, noted Xie.

As a result, hot money flow into China had eased, Xie observed. The competition for deposits is heating up. Banks are offering products that are like deposits and with much higher interest rates than the policy rates.

Xie is also rather less downbeat about the impact on the real economy of the slow deflation of the Chinese real estate market. “As Chinese real estate prices deflate slowly… the economy will hold up,” he wrote. And on the strength of exports, consumption and infrastructure spending, China would be able to sustain a GDP growth rate of 7-8% for the next decade, he added. “That seems low compared with recent years, but it will be much better for lifting wages, household living standards and corporate profits.”

There are, of course, still many ‘China bears’ out there, like hedge fund investor Jim Chanos —- who famously said that China was on a “treadmill to hell” and that China was “Dubai times 1000” —- and Marc Faber, who predicted a “crash” in China over the next year. For the moment, however, one of the loudest ‘China bears’, who was getting a lot of face time in the media, appears to have marginally lost his bile.