When it comes to the world economy, everyone is expecting China to come to the rescue. While the financial authorities there have reduced China’s growth expectations down to 7.5% this year, this pace is still envied by the rest of the world. The problem is that such a slowdown from over eight percent is starting to be felt by Chinese citizens…and soon the rest of the world.
Chinese real estate is a huge portion of China’s growth over the past decade. The Chinese authorities have been adamant in trying to lower costs for the average citizen, saying that they are trying to rein in the Chinese real estate bubble. Recent evidence appears that even though new Chinese real estate developments are being sold at 20%-30% discounts, the reductions are still not enough.
A recent survey published by the Chinese authorities states that 68% of households think home prices are still too high and only 14% were thinking about buying. This sign of the Chinese real estate market slowing down is going to be felt in many industries, namely commodities that are used in construction.
With China’s growth being reduced, especially in the Chinese real estate market, we’re going to see less demand for commodities like copper and iron ore. This past week, BHP Billiton Ltd. (NYSE/BHP) warned of flat iron ore demand from China.
China is the world’s biggest consumer of many commodities; for example, it’s responsible for the purchase of more than a fifth of global steel and over a third of copper demand. With BHP sending out the warning that China’s growth is appreciably slowing, changing future projections for many firms. BHP noted that it is increasingly cautious about commodity prices and would possibly be changing its investment plans to take China’s growth slowdown into account.
Chart courtesy of www.StockCharts.com
One commodity that has had a reputation of forecasting economic growth is copper. From the lows in October, with the news of monetary stimulus by world central bankers, copper prices moved up sharply, but have since stalled. This recent news of the deceleration in China’s growth rate is putting a ceiling on copper prices and more news of falling prices in Chinese real estate will only put further downward pressure on this commodity.
If we see financial authorities address the slowdown in China’s growth rate with more monetary stimulus or we see a pick-up in economic data, only then will we see the recent highs get taken out. Until then, this chart of copper is a warning sign that the world economy might be far weaker than many expect and China’s growth, if it slows any further, could be a serious drag on the rest of the world in 2012.