The Shanghai stock market recovered a bit -- a tiny bit -- in trading on Dec. 28 and then edged ahead again on Dec. 29. That two-day advance was the first time in a month that the Shanghai Composite Index has strung together two back-to-back gains.
But apart from those moves, the low of 2,174 on Dec. 29 marked the lowest point for the Shanghai Composite Index since March 16, 2009, when the index closed at 2,154.
Forget about the Oct. 20, 2011, low at 2,331 -- that's 7% above the current market. And the Nov. 3, 2010, high at 3,161? Well, the Shanghai market is down 31% since then.
Next stop of significance would be the November 2008 low at 1,720. That's 450 points below where we are today -- or a 20% drop from today's index level. A move back to 1,720 would mark a huge 46% plunge from the November 2010 high.
Why is the Shanghai market still falling, even though it looks as if the People's Bank of China is starting to loosen its monetary policy? Why am I even contemplating a 45.6% superbear for Chinese stocks?
Here's why.
The squeeze is on
At the recently concluded annual Central Economic Work Conference, China's political leaders and top economic officials decided that the government would continue to squeeze the housing sector until prices returned to "reasonable levels."
Jim Jubak
What's reasonable? Well, the work conference didn't define the term. But a recent report from the Agricultural Bank of China, one of China's state-controlled banks, has fleshed out what "reasonable" might mean for housing prices in China's cities. The numbers aren't pretty: Housing prices in China's most developed, first-tier cities (Shanghai and Beijing, for example) would need to drop an additional 10% to 25%. Prices in second-tier cities would need to drop 5% to 15% more.
The bank got to these numbers by looking at a 1998 survey by the United Nations of housing affordability in 96 countries. To be "reasonable," the bank concluded, prices should be six to eight times the average level of household income in China. (The bank, to its credit, assumed that China's average household income is 1.5 times the official figure from the National Bureau of Statistics.)
You can certainly pick holes in the Agricultural Bank of China's methods, and the extent of the decline to "reasonable" is only a rough estimate. The important thing from the work conference and the bank's report is the conclusion that the government is serious about continuing the current pressure on housing prices. The work conference's concluding statement said the government would "unswervingly adhere to real-estate control policies."
You can understand why this has kept the pressure on the stocks of property developers such as Poly Real Estate and China Vanke. Total housing starts could fall 15% in 2012, according to UBS.
The fear, for China's stock market as a whole, is that a slowdown in the real-estate sector will ripple out through the rest of the economy, creating a slowdown that the government can't counter before the country comes in for the dreaded hard landing.
A housing-driven economy
The residential real-estate sector itself accounts for 6.1% of China's gross domestic product, but investment in the sector drives demand for everything from cement to copper to construction equipment to home furnishings. Rising prices for residential real estate help drive up land prices -- and because land sales are a critical source of revenue for local governments, rising land prices help pay for local infrastructure development, education, health care and business investment. This connection between local revenue and real-estate prices is especially important, because China's official stimulus policies often rely upon local governments to provide the cash to fulfill directives from Beijing.
Any attempt to put a figure on the extent of real estate's actual share of China's GDP is just an estimate -- 15%? 20%? But you can see why investors and economists might be worried about the impact of a continued policy of reducing real-estate prices and about the ability of the central government to make up for the shortfall.
