Sagging economic reports from emerging market countries like China (NYSEA:GXC) are triggering government stimulus. And proponents of economic decoupling never looked so wrong.
In a surprise move, China’s central bank reduced its benchmark interest rates by 0.25%. Rates for 12-month loans fell to 6.31% while deposit rates dropped to 3.25%. If the growth outlook in emerging markets is so rosy as analysts forecast, why the stimulus?
Here’s reality: The very emerging markets that were supposed to lead developed markets (NYSE:EFA) out of recession and to the Promised Land are now themselves mired in mud.
China is battling sluggish economic growth and a housing bubble that its leaders deny exists.
Over the past 11 years, the investment in residential housing as a percentage of China’s GDP has tripled. That puts China right on par with a similar peak to the U.S. housing bust.
Reserve ratio requirements for Chinese banks have been slashed three times since November 2011. A Chinese banking crisis would make Europe’s (NYSE:EZU) situation look like a cakewalk.
Large cap Chinese stocks (NYSE:FXI) are down 21% while Chinese real estate stocks (NYSE:TAO) are off by almost 10% over the past one year.
BRIC stocks (NYSE:BIK), which include stocks from Brazil, Russia, and India, among China have lost 14.45% over the past three months.
The academics who promote the false idea of economic decoupling live in a fairyland world.
What can we expect from China going forward? More lackluster growth and more rate cuts. Bank on it.
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