An investor sits in front of an electronic board at a brokerage house in Hangzhou, Zhejiang province, China. Photo by Reuters
SINGAPORE - "It's like a horror movie. People like to watch, but don't want to be in it," quips economist Andy Xie about his popular lectures where he predicts a collapse in China's property and stock markets.
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 slumped in 2007-08.
Despite being challenged and marginalised, 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.
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.
Chang argues the modernisation 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.
Xie, who was labelled 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 amortising 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."