Economic Decoupling Is a Farce, China Cuts Rates

by ETFguide | June 9, 2012 9:00 am

Sagging economic reports from emerging market countries like China (NYSEA:GXC[1]) 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[2]) 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[3]) situation look like a cakewalk.

Large cap Chinese stocks (NYSE:FXI[4]) are down 21% while Chinese real estate stocks (NYSE:TAO[5]) are off by almost 10% over the past one year.

BRIC stocks (NYSE:BIK[6]), 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.

The ETF Profit Strategy Newsletter  identifies major investment themes and the ETF categories that offer the best profit potential.  

  1. GXC:
  2. EFA:
  3. EZU:
  4. FXI:
  5. TAO:
  6. BIK:

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