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By Stuart Burns

Continued from Part One.

It’s not just steel mills that are feeling the effects of slowing construction. Developers’ share prices have been sliding on the Shanghai stock market as China’s second-largest developer Gemdale Corp. said its October sales slumped 38 percent from a year ago. Bloomberg Businessweek, quoting Barclays Capital, is predicting house prices will fall as much as 30 percent next year.

So does this mean China is in for a major slump? Beijing certainly does not appear likely to relax the pressure on the housing market, and the export industry — another major driver of employment and prosperity in China — is not likely to find vibrant markets overseas in 2012. Tom Orlik writing in a WSJ article thinks not.

After three weeks of draining funds from the system, the People’s Bank of China (PBOC) released Yuan 96 billion ($15 billion) into the financial system this week. In addition, it is expected the PBOC may give the banks breathing space to meet new reserve requirements imposed back in August to cool the property market and inflationary lending. Finally, in December each year, apparently a large chunk of fiscal deposits — more than a trillion yuan in each of the last three years — leave the central bank and flood into the commercial banks.

In a normal year, the central bank would tighten the reins to prevent the banks from turning extra deposits into extra loans. If, as expected, the same or better happens this year, the commercial banks will have more money to lend. The trick will be channeling those loans to consumption and industry, not property. The catalysts will likely be the rate of inflation. If it falls towards the end of the year (as expected), Beijing may feel comfortable releasing the reins a little.

Inflation has begun to drop. Another couple of months of data will be required to confirm the trend, though, before the authorities will feel confident to act. Unpopular as falling house prices are among the moneyed middle class, rising inflation hits the masses even more – and therein lies the Party’s political survival.

Source: Chinese Steel Production And House Prices Down: Sliding Toward A Slump? - Part Two