Futures Down After Shanghai Composite Plunges On Slowdown In Housing Prices, Foreign Trade; BoJ Policy

The Chinese Shanghai index was lower by almost 3% overnight after a series of disappointing economic releases out of the country. The first showed a further cooling in property prices, leaving many to speculate if the housing ponzi was not beginning to unravel/ As Xinhua reports: "Housing prices in major Chinese cities rose 10.3 percent year on year in July, down from the 11.4 percent growth in June, the National Bureau of Statistics (NBS) said Tuesday. It was the third consecutive month that China's property prices rose at a slower pace and the lowest growth rate in six months." Adding to the downward pressure was news released from the Customs Administration (which we will spread later), which indicated that "China's exports rose 38.1 percent year on year to 145.52 billion U.S. dollars in July, but the growth rate was down from the 43.9-percent surge in June, the General Administration of Customs (GAC) said Tuesday." Concluding the Asian trifecta of negative news, was the Bank of Japan's refusal to further ease its monetary policy. US futures are lower by about 0.5% although all the action in the US will be focused on the FOMC statement released early this afternoon.

More on China's housing prices slowdown:

Property prices in the 70 large and medium-sized cities grew 12.4 percent in May and 12.8 percent in April, the highest since July 2005 when the government started to issue the data.

The slowdown follows a series of government measures to curb speculation in the property market and rein in excessive price rises.

On a monthly basis, July property prices in the cities were unchanged compared to a month earlier, the NBS said in a statement on its website.

New home prices rose 12.9 percent year on year in July, down 1.2 percentage points from June. Prices of second-hand homes gained 6.7 percent last month, compared with an increase of 7.7 percent in June.

The value of property sales in July fell 19.3 percent from a year earlier to 306.6 billion yuan (45.3 billion U.S. dollars). Property sales by floor space declined 15.4 percent year on year to 64.66 million square meters.

Investment in property development rose 37.2 percent to 2.39 trillion yuan in the first seven months of this year. In July, investment climbed 33 percent to 411.8 billion yuan.

The government started a campaign in April to rein in soaring prices, including tighter scrutiny of developers' financing, limited loans for third-home purchases, and higher downpayment requirements for second-home purchases.

"It's good growth in housing prices is slowing, but I think the growth rate is still more than what the government desires," said Zhuang Jian, a senior economist with the Asian Development Bank in Beijing.

The government should stick to their tightening policies already in place as there is still room for a correction in prices, he said, adding that there is no need for a further tightening.

He expects housing prices to continue to see slower growth rates over the rest of the year.

The China Banking Regulatory Commission said earlier this month the government will maintain policies to cool the property market. It also ordered banks in regions with soaring property prices to suspend making loans for third home purchases, according to credit risk assessments.

It also told lenders to estimate for a worst-case scenario of a 50 percent to 60 percent property price drop in cities where housing prices have risen excessively, Bloomberg reported Aug. 5.

The banking regulator said the stress tests did not reflect its outlook on the nation's property market.

China Vanke, the country's largest property developer by market value, said Monday its first-half net profit rose 11.4 percent from a year ago to 2.81 billion yuan.

Poly Real Estate Group, the country's second largest property developer, said its net profit in the first half rose 16.56 percent year on year to 1.627 billion yuan

And on the purported slowdown in exports:

Slower growth in imports of commodities such as steel, copper and plastic products was in line with the softening in fixed assets investment growth, said ANZ Bank analyst Zhang Hao.

It also indicated China's policies to optimize industrial structure and ease excessive capacity has paid off, Zhang added.

On a monthly basis, exports in July were up 5.9 percent from June, but July's imports edged down 0.4 percent from the previous month, the administration said.

China's growth in exports will continue to slow in line with the expected slowdown in economic growth in the United States and the European Union from the third quarter, said Wang Tao, economist with the UBS Securities.

Wang said growth in exports will continue to outpace that of imports for the rest of the year and she expects the annual trade surplus to hit 185 billion U.S. dollars this year.

The country's foreign trade totaled 262.31 billion U.S. dollars last month, up 30.8 percent from a year earlier.

The trade surplus for the first seven months totaled 83.93 billion U.S. dollars, down 21.2 percent over the same period last year.

July's trade surplus widened to 28.7 billion U.S. dollars, the highest level since February last year, sparking speculation that pressure on a stronger yuan will rise.

"The increase in the trade surplus is likely to add pressure to the exchange rate while the continued stronger-than-expected expansion in exports might help reduce some of the domestic concerns about a possible sharp weakening in external demand," Barclays Capital said in a report to clients.

"A possible pickup in capital inflows in the coming months in view of the global easing monetary conditions and excess liquidity searching for yield may also add to the appreciation pressure," it said.

The central parity rate of the yuan weakened to 6.7745 per U.S. dollar Tuesday from Monday's 6.7685, the strongest level since China abandoned a decade-old peg to the U.S. dollar in July 2005. The currency is allowed to float on the inter-bank market within a daily limit of 0.5 percent each way of the central parity rate.

The People's Bank of China, the central bank, announced on June 19 this year it would further reform the formation mechanism of the yuan exchange rate to improve its flexibility.

Liu Dongliang, financial analyst with China Merchants Bank, expects the exchange rate of the yuan to strengthen to 6.75 against the greenback by the end of the month.

According to the GAC, China's trade with the European Union, the country's largest trade partner, climbed 36.6 percent year on year in the January-July period to 263.16 billion U.S. dollars.

Trade with the United States jumped 30.6 percent during the period while that with Japan expanded 34.9 percent in the first seven months compared with a year earlier.

Brazil overtook Russia to become China's 10th largest trade partner, with bilateral trade surging 54.6 percent to 32.51 billion U.S. dollars from January to July.

And some hilarious quotes from BoJ's Shirakawa on monetary policy which directly contradict the actions of the SNB's Hildebrand over the entire first half of 2010.

"No central bank in developed nations targets forex levels in managing monetary policy ... Foreign exchange moves are one factor affecting an economy but they do not immediately lead to monetary policy ..."

"I acknowledge that yen rises pose a downside risk to business sentiment ...

"We need to examine the impact on the overall economy in a balanced way.

"We spent much time debating how the recent yen rise could affect business sentiment and the Japanese economy. This is an important point for us to examine, so we spent a lot of time debating it."

"Generally speaking, rises in the yen would weigh on Japan's exports and corporate profits near term. When looking at how that could affect the overall economy, we need to take into account various factors such as situations surrounding the world economy, corporate sales and profits and the financial environment.

"The world economy is recovering led by emerging economies, and corporate profits and sentiment are improving.

"While the yen has risen, long-term interest rates have fallen somewhat, helping lower corporate funding costs. The effect from low interest rates has strengthened on the economy when compared with corporate profits ...

"As such, Japan's economy is moving in line with our outlook report in April and its mid-term review last month. Of course, the U.S. economy and moves in foreign exchange rates could have a big impact on the economy.

"The BOJ fully recognises such a possibility and will continue to carefully examine it while making a balanced judgment based on global economic and financial developments.

"At the last meeting, we judged that risks to Japan's economy were largely in balance even though uncertainties were high.

"Having carefully examined economic indicators, data and briefings from companies since then, we have not found material that would greatly change our view. But given various factors are arising, we recognised the need for careful examination."


"Overseas financial markets have regained calm for the time being after Europe's stress tests ... But markets have tended to be easily swayed by U.S. economic indicators and remain unstable ...

"There have been several U.S. economic indicators showing slowing growth. But as a whole, the U.S. economy is gradually recovering ...

"The BOJ had expected balance sheet adjustments in the United States to be severe and we distanced ourselves from markets' somewhat optimistic views. We have said in our outlook report and the midterm review that the pace of the U.S. economy's recovery would be gradual. The current state of the U.S. economy is roughly in line with our cautious forecast."



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