Submitted by Zarathustra of Also Sprach Analyst [10],
When China [11] started tightening policy to fight inflation, almost no one thought that it would slow the economy [12] to what China [11] is in right now.
When China started imposing ever more aggressive real estate [13] prices curb, some people believed that that it would not make home prices drop (because there are many people in China, and urbanisation, etc), and even less believed that it would slow the economy [12] to what China is in right now.
When China started to slow down more than most thought, almost no one thought that it could be a big problem, while some thought that the slowdown was “engineered” to fight inflation. Because it was an intentional slowdown, not many people believed that it could get much worse.
After China’s shadow banking sector started blowing up, there is a bloke call Andy Rothman from CLSA who said there are “no shadow banks” in China.
After the slowdown “intentionally engineered by the government and the central bank” became consistently worse than expected probably since the start of 2012, consensus calls for recovery of growth in the next quarter. They call the same thing every quarter since then, because there is “much room for policy easing”, “much room to manoeuvre”, “can cut rates”, “can cut RRR”, “can use US$3.2 trillion FX reserve”, etc.
After Wen Jiabao announced this year’s growth target at 7.5% in real term [14], most thought that China has never not exceeded the growth target, so GDP growth will most probably be above 8%, said the consensus.
Many have been denying emphatically the possibility of a hard landing. Some like Qu Hongbin of HSBC even wrote that there is “no risk of a hard landing”.
So now, what do we have?
FT wrote [15] that even 7.5% growth target looks “ambitious” to some.
On the whole, except that the real estate market is holding up better than we thought [16] it could (yes, we did get that wrong, although we are not changing our view), the economy has been doing quite consistently poorer than the consensus, and occasionally even worse than what we thought to a point that at one point we thought we were not bearish enough, even as pessimists.
Although real estate [13] market is holding up better than expected, real estate companies’ profits have collapsed as expected and some overstretched speculators are facing negative equity [17].
Meanwhile, more and more risks from the shadow banking sector is surfacing, even in the formal banking sector.
Inflation has eased to a point that besides food prices, deflation is now a bigger risk [18].
Although the economy is not quite in a hard landing yet in terms of GDP growth (that is if you believe those numbers), for many companies [19] and employees [20], it already feels like one. For instance, Dong Tao of Credit Suisse painted a very grim picture:
It is evident that about 30-40% of manufacturing companies have closed doors or are considering closure in Guangdong and Zhejiang provinces, two of the largest export hubs for China.
Despite apparently high GDP growth, most had to learn a hard way in the past 2 or 3 years that stock market returns and GDP growth are not that correlated after all. In fact, Chinese stock market has been destroyed [21].
The majority of people have consistently been too optimistic about China for the past year or two. Digging deeper, we have not found much good reasoning behind those who insist on the uber-optimistic case, and most bullish arguments can be boiled down:
This is China. China is different. Don’t ask, just buy.
This is China. The government is omnipotent; the central bank has much room to ease policy, and has US$3.2 trillion FX reserve.
It is this common belief about the ability and willingness which makes those who were too optimistic too optimistic. Being an optimist on China’s economy has been wrong, at least for the past year or so.