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.

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