Swimming In The Summer Wine Of Bust

"Das wilde Leben" of swimming in the wine last night has its price. Societe Generale this morning writes about "No-nonsense picture of China's investment-led model", and the strong November data-set should assure every sceptic.

However, Dylan Grice, the global strategist at Societe Generale, was quoting Seth Klarman (look also at left top of this website) yesterday:

The best investors do not target return; they focus first on risk, and only then decide whether the projected return justifies taking each particular risk.

He is, of course, pointing to the credit printing presses in China, and the likely outcome of bust.

Well, Christopher Wood, the strategist at CLSA Asia-Pacific Markets writes today:

Still GREED & fear has long since learnt to view the mainland first and foremost through the prism of its political economy. And so long as China controls the main levers in the game, primarily through its closed capital account, GREED & fear takes the view that it is premature to conclude that China is about to succumb to the long discussed over investment bust.

And continues with:

As has been noted by CLSA China macro strategist Andy Rothman, the tendency to make alarmist predictions about China GDP at the end of last year has now been replaced in recent months by over exuberant forecasts. The likelihood is that China growth is likely to peak in the first quarter because of the base effect. Longer term, 8% annual growth seems a good target for both policy makers and investors to have in mind for the next five to ten years as China implements what can only be an incremental adjustment to a less investment led and more consumption led economy; though clearly if the export sector comes bouncing back like old times thanks to resurgent Western demand the growth can be higher than that though this would not be GREED & fear’s base case.

If this is the macro economic backdrop, the real issue for GREED & fear remains whether China is on the road to an asset bubble. This week’s visit has also confirmed that this risk remains real if not yet a reality. In this sense it still makes sense to remain overweight Chinese equities. Still the risks of an asset bubble later are real, most particularly if Western economies do not recover properly which means Western interest rates remain low and the Chinese government remains cautious about tightening too aggressively.

Nice chart of China monthly floor space started (housing starts rose by 194% YoY in November and are up 15.8% YoY year-to-date), click on chart to enlarge, courtesy of CLSA Asia-Pacific Markets.

State Council will take care.

The econtrarian Paul Kasriel gives your latest alternative to the US econsensus!