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Economic Decoupling is a Farce, China Cuts Rates

Ron DeLegge

Sagging economic reports from emerging market countries like China (GXC - News) 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 (EFA - News) 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 (EZU - News) situation look like a cakewalk.

Large cap Chinese stocks (FXI - News) are down 21% while Chinese real estate stocks (TAO - News) are off by almost 10% over the past one year.

BRIC stocks (BIK - News), 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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