Short-sellers cry wolf again on Chinese economy

BEIJING -- Some investment gurus, if they can be called that, periodically express their pessimism about the Chinese economy and short sell Chinese stocks, but it turns out theirs is nothing but a game of crying wolf.

Their bearish tone has mostly proven to be a shortcut for securing handsome profits, with the so-called gurus scooping up bargains after their forecasts result in stocks getting dumped.

The latest episode involved Kynikos Associates founder Jim Chanos, a keen short-seller who has been bearish on China for years.

He recently warned, "There is a credit bubble that's actually not only huge but getting worse," saying China's real estate sector is plagued by asset inflation that does not generate enough cash to service the debt.

He dumped hefty Chinese financial and real estate stocks, inspiring the herd behavior that sent China's stock index plunging on Wednesday, Thursday and Friday.

However, this time, his words were not pure alarmism. China's economy is contending with a bumpy recovery, as 7.7-percent GDP growth in the first quarter fell short of expectations.

Investment, consumption and exports have grown at more tepid paces. Manufacturing activity has cooled for months, and credit and property bubbles could be time bombs if not properly contained.

Premier Li Keqiang recently said the economy will have to "climb hills and cross ridges," underlining the difficulties and challenges facing the world's second-largest economy, which has said goodbye to breakneck growth.

Nevertheless, it is unnecessary and premature to pile pessimism on the Chinese economy.

Credit bubbles loom large, but have been under tight oversight. At a special session convened Thursday by the Standing Committee of the Political Bureau of the Communist Party of China Central Committee to review the country's economic situation, the country's top leaders underscored the need to guard against potential risks in financial sectors.

As part of the 4-trillion-yuan stimulus package that saved China from an economic meltdown in 2008, rampant growth in credit has triggered widespread concern, especially regarding mounting local government debt.

The debt has not ballooned in the way that foreign investment banks had forecast. Nevertheless, banking regulators have remained vigilant, telling commercial lenders to carefully monitor loans extended to local government financing vehicles.

Local government debts are protected and guaranteed by the central government, and this is the biggest reason why local governments are unlikely to default. If not with cash, their debts can be repaid through other means, such as asset restructuring.

Harsh property curb policies have prevented property bubbles from inflating further. The government has employed strong administrative forces to regulate pricing, and those measures have surely stemmed speculation and kept prices from skyrocketing.

The construction of subsidized, low-income housing and the expansion of property tax trials will also boost supplies and tame prices.

In fact, speculation that China's property bubbles will burst is likely to be just that -- speculation. Given that China's deepening urbanization drive is driving demand past what land supplies can offer, it is illogical and unrealistic to believe that prices will stay flat or fall in the coming decades.

Now, the government's duty is to prevent prices from surging recklessly, an event that could potentially trigger the kind of social unrest that the country can not afford.

China has lowered its GDP growth target to 7.5 percent for 2012 and 2013, down from 8 percent for the eight previous years. Readings in the past four quarters have stayed below 8 percent, but that has not given rise to jitters, as the government has prioritized balance over speed, and quality over quantity.

At Thursday's meeting of the Standing Committee of the Political Bureau of the CPC Central Committee, which was presided over by General Secretary of the CPC Central Committee Xi Jinping, who is also China's president, the central authority vowed to make greater efforts to bring out the potential of domestic consumption, lift or delegate the government's authority in approving investment projects and strictly limit the indiscriminate expansion of energy-inefficient and polluting industries.

The meeting offered details on the Political Bureau's future mind-set in managing the world's second-largest economy under new circumstances. Limiting the government's power in the approval of investment projects has been seen as the most courageous and pragmatic reform announced by the new cabinet yet, and it is expected to help unleash greater growth potential.

Though the days of being obsessed with speed have passed in China, this is not the case among foreign banks and investors. As China acclimates to tepid growth, foreign buyers will continue to fuss about the slower data, as if the slowdown is a sign that the end is near.

Since the top leadership knows that successful restructuring will take time and effort, a one-off stimulus package is unlikely.

China has the patience to embrace healthy growth, but short-sellers also need to exercise patience to secure safe profits.