The Great Wall of China Is Dropping In Value

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The Peoples Bank of China PBoC today said that property values in China have topped out and those they are in a slow decline. For many years the wealth of successful Chinese businessman, investors and multifaceted business has been compounded with the huge increase in the property markets. Most of the new “billionaires” of China have made their fortunes in Real Estate. Many have started out as successful business and used their profits to buy up real estate which generated unheard of increases.

In a statement summarizing a recent meeting between the People’s Bank of China and property and banking industry executives, the PBOC said real-estate developers’ cash flows have become tighter, while growth in property loans has slowed.

“A turning point for property prices has emerged,” the PBOC said, citing the conclusions of two of its reports discussed at the meeting.

The central bank’s statement comes after signs that China’s stubbornly high property prices are finally declining after a nearly two-year-long tightening campaign by the government.

Most of the inflation in China has been driven by the housing market. The PBoC is hoping to see price declines of up to 20%. Investors and Developers are afraid that price drops that radical might cause many investors to dump their property and cause additional price declines.

Beijing’s property policy is being closely followed by investors and observers, especially after the central bank surprised the market Wednesday with an earlier-than-expected decision to cut banks’ reserve requirements, the first such cut in nearly three years.

That latest monetary easing has been interpreted by market watchers as a clear signal that Beijing has decisively shifted its policy priority toward stimulating economic growth from combating inflation, even at the risk of reigniting a property bubble.

Reflecting the government’s intention to slow a U-turn in the property policy, the official People’s Newspaper said Thursday China’s latest easing measure is meant to aid the liquidity situation for the overall economy and isn’t aimed at the housing sector.

Earlier this week, the PBoC lowered the reserve requirement ratio for Chinese banks by 50 basis points, down to 21% for large banks, freeing up an estimated $63 billion in new lending.

The move is being described as a “surprise,” mainly because the PBOC and several top government officials have spent the last month adamantly asserting that China was committed to its policy of continued tightening, in order to rein in inflation and asset bubbles.  The reason such repeated denials were necessary was that the PBoC clearly was coming under immense pressure to loosen lending to local governments who have been warning that, they would not be able to make enough investments to achieve their GDP targets for 2012, and the overextended property developers were running out of the credit needed to continue financing their unsold inventories, which they had begun dumping onto the market to avoid the declining prices. The government needed to throw endangered parties a credit lifeline at the same time as they continue to push down housing prices and curb inflation.

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About:FX Empire Analyst - Barry Norman

Barry produces a private Daily Market Review newsletter that is distributed around the globe to over 25,000 subscribers and recently published a book on Options Trading that is available from amazon.com

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