Two years ago famed hedge fund short seller Jim Chanos made waves by predicting a real estate collapse for China. He proclaimed that China was like "Dubai times 1000, or worse." His predictions have not been proven right.

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The Chinese economy has grown by 9 percent over the past two years and real estate prices have also steadily risen over this period. The slowdown seen over the past few months is due to government initiatives to reduce soaring prices rather than from panic selling by debt-ridden homeowners.

Now, Chanos seems to be backtracking on his dire predictions. He told CNBC last week in an interview that, "China's going to survive all this. This is not the end of the next Middle Kingdom" but that China is facing a "pretty big speed bump." A speed bump, no matter how big, is quite different from Chanos’ earlier gloomy predictions.

I wrote in 2010 that Chanos had overestimated the amount of leverage in the residential property market and underestimated rising incomes of home buyers. Tight regulations in place for years have prevented home buyers from buying multiple properties and limited the amount of mortgage debt.

However, there are far more serious problems emerging in the real estate sector, and in general in China’s overall economy, than two years ago.

There has been a slowdown in manufacturing and housing prices. A closer look at the economy  actually shows that Chanos is correct this time – there is a serious speed bump in China’s economic future but that a soft landing is the likely scenario.

Developers have been cutting prices on new homes because they have outstanding loans they need to pay. But prices for second hand units owned by individual investors have barely budged. Why? Homeowners are not panicking and their mortgages, if they have any, are not underwater.

In interviews with dozens of homeowners my firm conducted in the past several weeks, the majority expected a 10 percent plus price drop, but only a minority said they would sell if prices dropped that much. Less than 5 percent said they were rushed to sell. Over 90 percent said they would hold on to the units no matter how long it took prices to rebound.

Moreover, there is massive pent up demand from both the average Chinese looking for a house to live in and from real estate investors with cash in hand looking for places to park money in, given the lack of alternatives.

Shaun Rein
Founder of the
China Market
Research Group

In interviews with several hundred consumers, 80 percent of them told my firm they expected to buy a home to live in within 3 years of regulations being eased. In 2010, China introduced a number of measures to control speculation. One of them was preventing non-residents from    buying a property in certain cities like Shanghai.

People in China have the money and the desire to buy homes but have been restricted from buying because of these regulations. They are now taking a wait and see attitude.

While the residential real estate sector is definitely slowing, pent up demand and lack of debt among homeowners will ensure a soft landing. However, the commercial side, which makes up 20 percent of China's real estate sector, is starting to show signs of a bubble. Blocked by government restrictions on the residential side, developers are rushing into ill-conceived commercial projects.

Even with luxury sales growing 20 percent a year, there are far too many luxury malls in development. The market can only sustain so many Louis Vuitton and Gucci outlets. Many developers are over-leveraged and might panic sell so the government needs to implement similar commercial development restrictions that it did on the residential side.

Looking ahead China’s consumer sector should continue to soar while the road ahead for the real estate and manufacturing sectors looks bumpy.

Shaun Rein is the founder and managing director of the China Market Research Group (www.cmrconsulting.com.cn) a strategic market intelligence firm, and is based in Shanghai.

He is the author of the upcoming book “The End of Cheap China: Economic and Cultural Trends that will Disrupt the World” published by John Wiley & Sons in the U.S. He does not own shares in any company mentioned. Follow him on Twitter at @shaunrein.