Equity Research in HK and Mainland China

Li Tang

Thematic (Sector/Industry)

We have seen a shift in the property policy stance from comprehensive tightening to finetuning policy, which includes some significant local easing such as the raft of measures announced in Harbin as well restarted RMBS issuance that is expected to top up mortgage quotas.
Two recent PBOC meetings affirmed the importance of “healthy property market development” and protecting homebuyers’ rights. This means that policymakers want the property market to be not too hot (as it was late last year) and not too cold.
The backdrop is the Evergrande crisis, based on high liabilities and triggered by plummeting home sales, but also expected growth pressures as the pandemic continues and with power shortages.

We have seen a shift in the property policy stance from comprehensive tightening to finetuning policy, which includes some significant local easing such as the raft of measures announced in Harbin as well restarted RMBS issuance that is expected to top up mortgage quotas.
Two recent PBOC meetings affirmed the importance of “healthy property market development” and protecting homebuyers’ rights. This means that policymakers want the property market to be not too hot (as it was late last year) and not too cold.
The backdrop is the Evergrande crisis, based on high liabilities and triggered by plummeting home sales, but also expected growth pressures as the pandemic continues and with power shortages.

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Cross Asset Strategy

13 months after its introduction, China's "Three Red Lines" (TRL) policy initiative (to reduce leverage, improve debt coverage and increase liquidity) for property companies is beginning to have a serious impact. A key contributory factor is that TSF (total social financing) has increased by a more moderate RMB21.68 trillion in Jan-Aug 2021 than last year (RMB25.97 trillion in Jan-Aug 2020), which still implies 10.3% YoY growth in the stock of TSF (to RMB306.83 trillion, or US$47.5 trillion), which is near the slowest-ever pace since TSF began to be published. The stock of M2, bank credit and TSF in China are at historic highs never reached by any other country, and the growth of all these aggregates continues, albeit at a marginally slower pace.Despite the abundance of liquidity (and the cut in RRR in mid-July), real GDP is growing barely over 5% YoY in 3Q 2021, with retail sales decelerating to 2.5% YoY growth and industrial production to 5.3% YoY growth in August 2021. The latter was largely export-driven (helped by a surge in global trade), as FAI (fixed asset investment) declined 2.1% YoY in May-August 2021. Such an economic deceleration in the year before an important leadership transition (i.e., rubber-stamping of continuity for Xi, change for others around him) will be met by further monetary easing in October 2021. That half of the 10 largest residential-property developers are Guangdong-based (a province traditionally known for both entrepreneurship and rebellion) makes them particularly vulnerable to the political crackdown on capitalists. The focus increasingly will be on cutting the costs of property, healthcare and education, not just tech titans.  However, moral hazard will be tightly managed. Onshore (local currency) bond holders will bear relatively few losses on high-profile names like Evergrande (although there will be credit events for bank loans), while offshore foreign-currency bond holders are likely to feel considerable pain (i.e., the partial end of the "moral hazard play"). The political crackdown on sundry capitalists -- tech titans, others seeking overseas listings, property developers, gaming companies -- will persist, adding more to the China Premium. We would recommend staying Underweight China equities amid the uncertainty generated by this political instability, which will result in a new equilibrium discount on Chinese valuations emerging by early 2022.

13 months after its introduction, China's "Three Red Lines" (TRL) policy initiative (to reduce leverage, improve debt coverage and increase liquidity) for property companies is beginning to have a serious impact. A key contributory factor is that TSF (total social financing) has increased by a more moderate RMB21.68 trillion in Jan-Aug 2021 than last year (RMB25.97 trillion in Jan-Aug 2020), which still implies 10.3% YoY growth in the stock of TSF (to RMB306.83 trillion, or US$47.5 trillion), which is near the slowest-ever pace since TSF began to be published. The stock of M2, bank credit and TSF in China are at historic highs never reached by any other country, and the growth of all these aggregates continues, albeit at a marginally slower pace.Despite the abundance of liquidity (and the cut in RRR in mid-July), real GDP is growing barely over 5% YoY in 3Q 2021, with retail sales decelerating to 2.5% YoY growth and industrial production to 5.3% YoY growth in August 2021. The latter was largely export-driven (helped by a surge in global trade), as FAI (fixed asset investment) declined 2.1% YoY in May-August 2021. Such an economic deceleration in the year before an important leadership transition (i.e., rubber-stamping of continuity for Xi, change for others around him) will be met by further monetary easing in October 2021. That half of the 10 largest residential-property developers are Guangdong-based (a province traditionally known for both entrepreneurship and rebellion) makes them particularly vulnerable to the political crackdown on capitalists. The focus increasingly will be on cutting the costs of property, healthcare and education, not just tech titans.  However, moral hazard will be tightly managed. Onshore (local currency) bond holders will bear relatively few losses on high-profile names like Evergrande (although there will be credit events for bank loans), while offshore foreign-currency bond holders are likely to feel considerable pain (i.e., the partial end of the "moral hazard play"). The political crackdown on sundry capitalists -- tech titans, others seeking overseas listings, property developers, gaming companies -- will persist, adding more to the China Premium. We would recommend staying Underweight China equities amid the uncertainty generated by this political instability, which will result in a new equilibrium discount on Chinese valuations emerging by early 2022.  

We are still reasonably positive on the outlook for underlying demand for housing amid an uneven economic recovery in which consumer confidence over employment and income prospects is building.Mortgage availability remains good. We believe monetary policy will continue to normalise as the economic recovery continues, even as PBOC ensures sufficient short-term liquidity to manage financial risks.
<ul class="" type="disc">
<li>China New Home prices grew at slowest monthly pace since March of this year</li>
<li>The real estate investment and property sales remained robust In Nov</li>
<li>Developer financing growth accelerated in Nov</li>
<li>30 large cities property sales still relatively strong in Dec, but with regional divergence</li>
<li>Xi'an and Hangzhou city tighten  property control policy by raising  down payment ratio for the second home buyer.</li>
</ul>
Top picks: <a href="https://www.smartkarma.com/entities/china-vanke-co-ltd" target="_blank" data-smartkarma-citation="entities:26076:1" rel="noopener">China Vanke (000002 CH)</a> <a href="https://www.smartkarma.com/entities/yango-group-co-ltd" target="_blank" rel="noopener">Yango Group (000671 CH)</a> ,<a href="https://www.smartkarma.com/entities/china-resources-land-ltd" target="_blank" rel="noopener">China Resources Land (1109 HK)</a>, <a href="https://www.smartkarma.com/entities/poly-real-estate-group-co-ltd" target="_blank" rel="noopener">Poly Real Estate Group Co., (600048 CH), </a><a href="https://www.smartkarma.com/entities/shanghai-shimao-co-ltd-a" target="_blank" rel="noopener">Shanghai Shimao Co Ltd A (600823 CH)</a>

We are still reasonably positive on the outlook for underlying demand for housing amid an uneven economic recovery in which consumer confidence over employment and income prospects is building.Mortgage availability remains good. We believe monetary policy will continue to normalise as the economic recovery continues, even as PBOC ensures sufficient short-term liquidity to manage financial risks.

China New Home prices grew at slowest monthly pace since March of this year
The real estate investment and property sales remained robust In Nov
Developer financing growth accelerated in Nov
30 large cities property sales still relatively strong in Dec, but with regional divergence
Xi'an and Hangzhou city tighten  property control policy by raising  down payment ratio for the second home buyer.

Top picks: China Vanke (000002 CH) Yango Group (000671 CH) ,China Resources Land (1109 HK), Poly Real Estate Group Co., (600048 CH), Shanghai Shimao Co Ltd A (600823 CH) 

China Real Estate: Property Sales Growth Turns Positive but Investment Slowed,new Home Prices Cool

Vice-Premier Liu He wrote an article in the people's Daily on China's 'dual circulation' strategy on Wednesday in which he noted that the real estate industry influences investment and consumption, and is connected to people's livelihoods and development. Liu's speech maintains existing top-level property policy, but at the same time relates property to investment and consumption, implying that property policy setting could be considered jointly with investment and consumption targets. This suggests a more pragmatic approach towards property policy weighting up risks against growth benefits.
Rumour spread in the market that regulator will tighten the trust funding quota approved due to a risk concern, fears were quick to emerge of a liquidity squeeze for some of China's indebted developer, causing its shares and bonds to tumble. However, in the last week we have seen several cities such as Harbin in last week issuing the policy to support property sales. Those can be seen as policy support for the sector.

Vice-Premier Liu He wrote an article in the people's Daily on China's 'dual circulation' strategy on Wednesday in which he noted that the real estate industry influences investment and consumption, and is connected to people's livelihoods and development. Liu's speech maintains existing top-level property policy, but at the same time relates property to investment and consumption, implying that property policy setting could be considered jointly with investment and consumption targets. This suggests a more pragmatic approach towards property policy weighting up risks against growth benefits.
Rumour spread in the market that regulator will tighten the trust funding quota approved due to a risk concern, fears were quick to emerge of a liquidity squeeze for some of China's indebted developer, causing its shares and bonds to tumble. However, in the last week we have seen several cities such as Harbin in last week issuing the policy to support property sales. Those can be seen as policy support for the sector.

China's Real Estate Sector to Be Tightened

For China regulator, the challenge is to keep the economic ship steady while avoiding creating asset market bubble such as real estate sector. Pan Gongsheng, deputy governor at the PBOC, said last week the central bank would focus on improving the macro-prudential monitoring, evaluating, and alerting systems in key areas including real estate financing.
We believe PBOC liquidity policy object towards real estate is adjusting from a reasonably hands-off approach in H1 to allow the property to support growth to mixed goals: curbing financial risks (developer debt/fast-rising land prices) and still allowing a property to support growth (given macro risks).
There are signs of a more stringent real estate financial regime in Q4 as regulators are seeking more transparency from property developers, calling for more details about current debts, to rein in borrowing costs and quell broader financial impacts.

For China regulator, the challenge is to keep the economic ship steady while avoiding creating asset market bubble such as real estate sector. Pan Gongsheng, deputy governor at the PBOC, said last week the central bank would focus on improving the macro-prudential monitoring, evaluating, and alerting systems in key areas including real estate financing.
We believe PBOC liquidity policy object towards real estate is adjusting from a reasonably hands-off approach in H1 to allow the property to support growth to mixed goals: curbing financial risks (developer debt/fast-rising land prices) and still allowing a property to support growth (given macro risks).
There are signs of a more stringent real estate financial regime in Q4 as regulators are seeking more transparency from property developers, calling for more details about current debts, to rein in borrowing costs and quell broader financial impacts.

China Developer Bond Issuance Still Grow Despite Tightening

China

China Vanke Co., Ltd. operates real estate development businesses.  The Company provides housing renovation, housing loans, real estate brokerage, and other businesses. China Vanke also operates logistics, material supply, and other businesses.

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China Vanke (000002 CH)

China Real Estate:Easing Builds Momentum

We have seen a shift in the property policy stance from comprehensive tightening to finetuning policy, which includes some significant local easing...

Li Tang

China: The End of the Moral Hazard Play?

Moral hazard will be managed, not ended. Offshore bonds, local loans will bear pain. Property, health, education costs must fall. We recommend...

Prasenjit K. Basu

China Real Estate: Property Sales Growth Turns Positive but Investment Slowed,new Home Prices Cool

We are still positive on the outlook for underlying demand for housing amid an uneven economic recovery in which consumer confidence over...

Li Tang

China's Real Estate Sector to Be Tightened

Overall property policies lean towards tightening.The change will constrain highly leveraged developers mostly but providing opportunities for...

Li Tang

China Developer Bond Issuance Still Grow Despite Tightening

The new real estate financial rules have not yet had an impact on developers,China Developer bond issuance still grow despite tightening rule.

Li Tang

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