Am I bearish on China?

9 December, 2010, 21:14. Posted by Zarathustra
Tags: Economy, Inflation, Recession, Wikileaks

I believe I have presented some rather unpleasant views on China over the past month or two. So unpleasant that some readers told me that it feels like terrible. But am I really bearish on China?

To briefly summarise all these terrible stuff, I wrote a three-part series on why China is posing the biggest risk to the global economy. I also wrote that if China slows, there will not be any decoupling to speak of. The crazy expansion of money supply drives inflation and asset bubbles that is getting more serious now, so serious that it almost requires a recession to stop it. But the worries on local government debt will make it extremely undesirable to take such a kind of momentous decision to engineer a recession, so the government will have a hard time to strike a balance between tightening and not tightening. On a longer term prospect, I have also suggested that China has its demography working against them, and this would be a vote of confidence for its neighbouring country: India.

So am I bearish, after all? Yes and No, if you can forgive me the expression.

I am bearish because the Chinese economy is just less healthy than people think. Asset bubbles are still looming, and inflationary pressure is high. Social unrest is the nightmare for the Chinese government, and high inflation was at least part of the reasons why students came out and protest in 1989. So the Chinese government is aware of the risks of overheating, and they are well aware that they need to tighten monetary policy. The worries on further tightening are exactly why Hong Kong and China stock markets have been doing rather poorly of late, and rightly so, because for the tightening to really work, it will have to be so aggressive that recession is almost inevitable.

The Chinese government is worried about inflation, but it is at least equally worried about slowing growth, if not more. For one thing, land sales is an important source of funding for the indebted local government. If monetary tightening went too far, the immediate collapse of real estate market would leave many provincial governments in effect bankrupted. That is why some officials in China have come up with all sorts of lame ways to contain inflation while not hitting the core of the problem: undervalued Chinese Yuan and monetary expansion. And if inflation could lead to social unrest, so would slowing economic growth, no question about that.

So am I bearish, after all? I believe the Chinese government will try very hard to strike the right balance between maintaining growth and avoid overheating. That will be a very difficult balance to make, and any slight miscalculation would tilt the balance to one side or the other. So what I can do is to wish them good luck in this mission impossible. At the end of the day, they will make up some nice numbers (by the way, I have long believed that Chinese statistics are made up, and the revelation from wikileaks is extremely gratifying), but people who live in the country can feel whether the balance is being tilted towards the recession side or overheating side.

For more news and analysis, visit Also sprach Analyst. Follow us on Twitter and Facebook.