China Prepared to Let Housing Prices Sink in Spite of Economic Slowdown; Transition to New Regime Underway; Decoupling in Reverse

If you are looking for the reason the Shanghai stock market has been one of the weakest globally, then look no further than China Affirms Property Curbs Even With ‘Grim’ Outlook

China’s leaders affirmed they will stick next year with a campaign to bring down property prices even as a “very grim” global outlook threatens growth in the second-largest economy.

The nation will target “basically stable” consumer prices and “unswervingly” implement real-estate curbs, according to a statement after an annual economic planning meeting in Beijing. At the same time, officials will seek “steady and relatively fast growth,” Xinhua News Agency said.

“The authorities are cautious about a premature or aggressive easing of policy, while committed to be pre-emptive and flexible to roll out supportive policies if needed,” said Chang Jian, a Hong Kong-based economist at Barclays Capital, who formerly worked for the World Bank. “The policy focus will be shifting from managing inflation to supporting growth.”

In China, the theme for next year is “progress amid stability,” Xinhua said. “Stability means to maintain macro- economic policies basically stable, maintain steady and relatively fast growth, keep overall price levels basically stable and maintain social stability.”

Policies will be fine-tuned as needed and the nation will press on with economic reforms, the statement said. The global outlook “remains very grim” with China facing pressure for growth to slow and prices to rise, operational difficulties at some companies, and “a grim situation in energy saving,” the statement from Xinhua said.

In December last year, the government officially shifted its monetary policy stance to “prudent” from “moderately loose.” The party’s 25-member Politburo said last week that that label will remain unchanged for 2012 and fiscal policy will remain “proactive.”

China will speed construction of “ordinary commercial residential housing” and seek to return home prices to a reasonable level, today’s statement said. The yuan’s exchange rate will be kept “basically stable,” it said.

Decoupling in Reverse

click on chart for sharper image

Many thought China would "decouple" from the global economy and the Chinese stock market would follow.

Well, I have to say the decoupling theory was correct, except in reverse. The $SSEC Shanghai stock index is down about 60 percent from the 2008 high and has shown no propensity to bounce since summer of 2009, precisely when the US recession ended.

A retest of the October 2008 low may be coming up.


Transition to New Regime Underway

As mentioned on numerous occasions, there is a change next year in Chinese leadership. I have long speculated the next regime will be less focused on infrastructure and real estate, and more focused on supporting consumer spending.

The above statements from China provide a big hint that China finally realizes its infrastructure/Real Estate/Export model is dead.

Thus, commodity bulls (particularly metal bulls) better think twice about the alleged "insatiable demand" of China. They also need to think twice about decoupling theories that suggest the Chinese tail will wag US and European dogs.

Recall that Europe is China's biggest trading partner, and Europe is without a doubt in recession. Moreover, the European recession will become much worse before it gets any better.

The irony in this setup is the one nation most likely to decouple from the global economy in a positive sense is the US.

However, I am sticking with a recession call as noted in "Wall Street is Little More than Glorified Crack House"; ECRI Sticks with US Recession Call; So Does John Hussman, with Odds Above 80%; So Do I; SF Fed has 50-50 Odds


Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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