Bears and bulls in China

Last week I met with the Beijing Chief Correspondent of a leading global newspaper, who told me about how much pressure his team was under because the number of articles they had to produce on China was already very high and kept increasing. 

It is true that nowadays, China makes the headlines around the world almost every day; and multinational companies are starting to put the world’s second largest economy at the centre of their strategies. It is becoming common for people that I know here who work as country managers for multinational companies to have to report directly to the CEO in Europe or the US, unfortunately implying many sleepless nights spent on conference calls and intercontinental flights.

For journalists, like many expats living in China (myself included), it is obviously exciting to work in a place that gets so much attention and for good reasons, that is rapid expansion and not street riots. But there is a downside to this newly-gained focus; news coming from China almost always brings with it anxiety, and it is striking how rumours, bogus news and misguided interpretations about what’s going on in this country float around, both inside China and abroad. It’s good that we are a team on the ground in Shanghai that can do our own research work and cross-check all information.

In China, the pace of change is very fast. And there are, after all, not that many people following and understanding this country. Could this be the reason why there are such extreme differences in interpreting what’s going on here? Indeed, after spending one year in China, I can’t help being amazed at what I call “the bears and the bulls dichotomy” that prevails for every single event or development of some significance.

To illustrate this: China’s third quarter GDP growth rate came out last week at 9.1% year-on-year. It was just marginally below forecasts, but triggered a sell-off in the markets, and alarming headlines about China inevitably facing a hard landing and about its unsustainable investment and cheap export-driven growth model. First of all I would say that 9.1% is good. Secondly, the leaders of the country themselves want the economy to slow down, orchestrating a “slower but higher quality growth”. But had growth been 9.5%, the reaction would have been just as strong: although instead there would be big concerns about China overheating and the risk of further tightening…

Another obvious example is how people read the real estate market indicators, such as prices and inventories. Are prices going down or seeing slow-down in growth? Then the bears talk about the collapse of the property market and huge problems facing property owners, real-estate developers, local governments and the whole of China, while the bulls celebrate the fact that Beijing is succeeding in cooling down the overheated property market, that it might mean the end of the tightening period and that we can nevertheless trust that long-term underlying demand will keep creating massive opportunities anyway. Are prices going up? Then the bears flag up for a “housing bubble”, “ghost cities” and “social unrest”; whereas the bulls would tend to focus on the increasing wealth of the Chinese and the fact that despite tightening, the property market (the largest asset class for the Chinese population) still looks good.

Not only economic development is subject to the dichotomy. On the political side, you will hear those praising the stability of the political regime in enabling better economic ruling at the same time as you will hear warnings that no dictatorship is able to maintain order in a country with surging wealth disparities, an economic slowdown, a booming Internet sector and rampant inflation. Internationally there will be the hopeful ones – may they be governments or companies - expecting a rescue from Chinese knights. And there will be the suspicious minds criticizing the Chinese for opportunistic and/or politically-motivated outbound FDIs.

There is no black and white and there is no absolute truth. One thing that is for sure is that Chinese demand has become more important given the weakness of the US and Eurozone, and everyone seems to worry more about what’s going on in China. In the long term, increased interest combined with a genuine interest in understanding the underlying trends, is good – China deserves it. In the short term, I really think the bears are getting too much traction and that is one of the main reasons why Chinese equities’ valuations are close to 2008-09 lows. Then again, that creates an excellent entry point for investors that can have a long-term perspective.