China Warns of Bankruptcies, But Buffett Says Not to Worry
If you ask chief financial officers in China, they will probably tell you that there is a real estate bubble in the country. A survey of CFOs from around the world conducted by the Fuqua School of Business at Duke University found that 90 percent — 90 percent — of them believe there is a real estate bubble in China. Moreover, the CFOs believe there is about a 30 percent chance that the bubble will pop this year, and 75 percent of them believe that the deflation would “pose a medium or significant problem for China’s economy.”
Fuqua professor Campbell R. Harvey, founding director of the survey, doesn’t restrict the fallout to just China. “If the real estate bubble were to burst in the world’s second largest economy — China — the reverberations across the globe would be massive,” he said in a press release about the survey.
This idea — that there’s a massive real estate bubble ready to blow in China — has been kicking around for a couple of years. Infamous China bear Jim Chanos, president and founder of the hedge fun Kynikos Associates, has been warning of the burst since at least 2009 when the United States was waste-deep in the wreckage of its own collapsed housing bubble (for the record, just 16 percent of CFOs believe there is another housing bubble in the U.S., according to the Fuqua survey.)
The veracity of the bubble thesis is hard to measure. On the one hand, if the past decade has taught us anything it’s that under the right circumstances, any (or every) market is a ticking time bomb. This should, in theory, make investors more resistant to disaster myopia — but on the other hand, the third for yield is hard to quench.
In the wake of the late-2000s financial crisis, China’s economic growth has appeared frenetic compared to most of the rest of the world. Not finding any demand in the U.S. or Europe, multinational corporations turned to China for growth. The Chinese government provided fuel for the engine (fire?) through massive infrastructure projects that dominated the markets for energy and raw materials.
According to the U.S. Congressional Research Service, China’s real GDP growth averaged 9.6 percent between 2008 and 2011, and grew 7.7 percent in both 2012 and 2013. This marks a highly discussed and somewhat intentional slowdown — after a $586 billion post-crisis economic stimulus package coupled with loose monetary policy, Chinese policymakers have decided to apply the breaks and try to bring the economy down to a more controllable speed — but it’s hard to kill that much momentum. The World Bank forecasts that China’s economy will grow another 7.7 percent in 2014, and 7.5 percent in 2015 and 2016.
When an economy as large as China’s gets going as fast as it is, market watchers can’t help but expect the worst. It’s like an 18-wheeler loaded with iron ore careening down the highway at 100 miles per hour — or some other massive object moving very quickly.
Speaking at the annual session of the nation’s people’s congress, Premier Li Keqiang confirmed some of the fears of pessimistic market watchers around the world. ”We are going to confront serious challenges this year and some challenges may be even more complex,” said Premier Li Keqiang. “This is not going to be easy.”
The news, combined with continued uncertainty about the situation in Ukraine and in several other countries around the world experience social upheaval, scared many U.S. investors and contributed to one of the worst weekly declines in the past few months.
Ever the optimist, though, business magnate Warren Buffett, chair and CEO of Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB), warned investors not to react hastily to the situation in China. Speaking with CNBC, the investor told viewers that the tension doesn’t necessarily mean that it’s a good time to sell.