CHINA’S PROPERTY MARKETS ARE FORECASTING PLUNGING COPPER PRICES
Bloomberg’s chart of the day shows the very high correlation between the Chinese property market and copper prices. Property prices have been a reliable leading indicator of economic activity in China and commodity prices. If the Chinese property market is telling us anything right now it’s that global economic activity could be due for a dip in the coming months:
The CHART OF THE DAY shows the Shanghai Property Index of Chinese developer stocks, which has led moves in copper prices since 2007, is falling. Concerns among investors that China will introduce policies including a property tax to curb home prices drove a 29 percent drop this year in the index of 34 real-estate companies traded in Shanghai. China makes up 27 percent of world copper demand, Goldman Sachs Group Inc. said in January.
“There could be further downward pressure on the copper price,” MF Global analyst Jeremy Cave wrote in a report. “Over 40 percent of copper is used in construction, so the relationship with Chinese property markets is clear.”
Investors seem very bullish despite mounting risks.
I highly recommend reading the following article
http://mpettis.com/2010/06/the-shanghai-market-isn%e2%80%99t-really-predicting-anything/
Mr. Pettis’ track record of calling the Chinese equity markets is less than enviable. Like most economists he doesn’t seem to have the fainest clue how to connect the dots between equity prices and economic activity. This case appears to be no different.
Thanks a million BK – that was a truly worth while link!
you might be interested in this new credit suisse report on china real estate, and specifically the impact of a possible property tax
http://www.sinocism.com/archives/769
Seems to support the Pettis’ analysis in the link provided by BK, no?
This chart proves nothing.
If this logic is based on the correlation between Chinese property and commodity prices, I would take it with a grain of salt.
First it’s copper not all commodities. Two, it’s not that corellated. Look at the period from late 2007 until mid 2008 where property values in China fell yet copper prices rose.
Also look at the last year from mid 2009 until now where property values fell again and copper rose.
Finally copper is not refelctive of the direction of all commodities.
It well may be true that Property prices have been a reliable leading indicator of economic activity in China and commodity prices….but I would not base it on this relationship alone, that’s for sure.
You could find yourself missing big moves waiting for the two to get inline with each other.
Obviously, Shanghai is not China but only one city. Jim Rogers says that property could remain booming inland in China while the coastal cities may have some problems due to their bubble. Demand for copper in the rest of China may remain high or steady, even if Shanghai collapses.
As an engineer, I know that copper is used in every appliance and electronic device. It is a very useful element. Just on that basis alone, I would say that the drop in cooper prices is an indication of severe deflation. All because the government backed counterfeiting cartel cheated savers and drove borrowers into debt slavery.
I learned a lesson about leverage once; I stepped on a garden rake. My forehead remembers to this day.
The enormous build-out of the electrical grid in China will have a far greater positive effect on the price of copper. Even with all the so-called hording of copper by China in their warehouses, it doesn’seem to last long. China’s recent prediction of reduced commodity demand is probably an attempt to talk down price while it locks in supplies. While there is a very real probability of deflationary forces in commodities, don’t expect them to last long in copper’s case.