At the beginning of the year we were inundated with investor concerns about the Chinese bubble. Now the worries centre upon Beijing braking too hard and thus compounding the “growth scare”. It appears that Goldilocks is a blonde and therefore can never be Chinese!!
As media coverage shifts from evidence of ‘the Chinese property bubble’ to evidence of price falls in major cities and a sharp reduction in sales volume country-wide, we cannot help concluding that this is clearly the desired outcome for the Chinese Government. But just as Beijing did not want a bubble nor does is it keen for the property market to implode. Luckily, and in stark contrast to the West, a stable property market is to a large degree in the Government’s gift. This is because the downturn – and the rebound last year – has been driven by changes in regulation, not economics. Regulation in China can, and does, change overnight. This is a very different situation to the excess leverage/negative equity situation in the West, which is not amenable to rapid change. The majority of Chinese property purchases are still done with 50-100% cash, and banks’ attitudes to granting credit are not pro-cyclical as in the UK or the US.
“Why should Beijing stop tightening and why now?” As to “Why?” well, the tightening has now had an effect (see above) and this will be seen explicitly in the official figures that will be published in the coming weeks. As to “Why now?” we interpret Premier Wen’s recent exhortation to his regulators that the time has now come for “more coordination between departments” as a clear signal to give their tightening policies a breather.
Property stocks in the region are now very oversold and at large discounts to NAV. We are selectively buying the quality names in Hong Kong, Taiwan and Singapore (sold off primarily as collateral damage to the Chinese developers, exacerbated by some minor changes to selling practices in Hong Kong), and starting to look at the quality end of the Mainland Chinese developers.
