China contrarians are the bulls

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Cam Hui at Humble Student of the Markets wonders if Stephen Roach's bullishness on China is a contrarian signal: "It was with some surprise that I saw Roach's bullish commentary on China entitled 1 0 Reasons Why China is Different. When the perennial bear turns bullish, is it time to sell?"

Contrarian signals are always fun to examine, and sometimes profitable. Some observers like to point to major magazines embracing a dominant point of view as potential turning points - that is, magazine covers that highlight stories about the bull market often coincide with bear market downturns, and vice versa.

But in Mr. Roach's case, I'm not sure he can be seen as a contrarian signal, simply because his view hasn't changed all that much. Mr. Roach is the non-executive chairman of Morgan Stanley Asia and in the past he was a consistent voice for bearish views. But not on China, at least not recently.

Here's what he told the Wall Street Journal about China's so-called property bubble last July: "I think it's really wrong to view China as an enormous macro property-bubble story."

And earlier, in a 2009 Financial Times article in which he raised concerns about China's over-reliance upon exports at the expense of domestic consumption, he said: "Unlike most, I have been a steadfast optimist on China."

Now, Mr. Roach is merely updating his views and confronting the growing ranks of what he calls "China doubters," who point to inflation, excess investment, rising wages and bad bank loans.

"There is a kernel of truth to many of the concerns cited above, especially with respect to the current inflation problem," Mr. Roach said. "But they stem largely from misplaced generalizations."

Meanwhile, China's Shanghai stock exchange composite index has fallen 3.6 per cent in 2011 and is 56 per cent below its 2007 high, suggesting that share prices are already reflecting many of the concerns about the country's economy. So perhaps Mr. Roach is the contrarian voice here. That doesn't necessarily make him right - but it does appear to answer Mr. Hui's question about whether he signals a time to sell. He doesn't.