Investors demand property to be fixed before purchasing in China.
Investors demand property to be fixed before purchasing in China.
China’s Property Sector Needs More Than Words to Regain Confidence
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Last week, the Politburo’s announcements regarding changes to China’s real estate policy and other measures to stimulate the economy caused a surge in buying activity in the country’s stock markets. However, foreign investors are cautious, stating that concrete actions will be needed to restore confidence in the beleaguered property sector.
The real estate sector plays a significant role in China’s economy, accounting for a quarter of its GDP. Yet, developers are grappling with mounting debt and repayment problems, while sales continue to decline. While the Politburo’s signals sparked hope among foreign investors, they are waiting for more specific measures to be unveiled.
Tara Hariharan, managing director at global macro hedge fund NWI Management LP, emphasizes the need for clarity on the resources that will be deployed. While investors hope for meaningful stimulus, China’s focus on deleveraging and preventing financial risks remains a concern.
Qi Wang, the chief investment officer of MegaTrust Investment (HK), acknowledges that the real estate sector is worth rescuing. However, he urges caution, noting the lack of detail provided by the Politburo. Wang believes that more drastic measures are necessary to address the sector’s challenges.
Restoring the health of the property sector would have a significant impact on the Chinese economy, potentially unlocking consumer spending by homeowners who have lost faith in the housing market as a wealth storage option. Mark Dong, general manager of Minority Asset Management, has reduced exposure to the property sector, pointing out the lack of substantive measures to support developers.
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For a sustained recovery, analysts suggest that a national-level loosening, such as cutting loan down-payment ratios, may be necessary. Bo Zhuang, a senior analyst at Loomis Sayles Investments Asia, believes that such a bold move would be required to make a real difference.
Jingjing Weng, head of Chinese equities research at Eastspring Investments, explains that last week’s rally was primarily driven by short-covering. Investors are in a “wait and see” mode, awaiting a more sustainable rally before reinvesting in Chinese equities.
While the rally on July 25 resulted in the largest one-day rush of foreign net stock purchases in a year and a half, the overall net buying for the year is relatively stagnant. Rob Hinchliffe, portfolio manager at PineBridge Investments, notes that their exposure to China is lower than it was a year ago due to the investment challenges posed by top-down decisions.
Wai Mei Leong, fixed income lead portfolio manager at Eastspring Investments, expects the property sector’s recovery to be prolonged, lasting for two to three years. Her fund focuses on government-owned or affiliated property firms.
The concerns surrounding developers’ debts and their ability to generate cash have persisted for the past decade. While the relaxation of COVID controls did not lead to a sustained rebound in sales, even stable developers like Country Garden are facing cash flow issues.
Fund managers and investors express a lack of confidence in the ability of developers to survive the current challenges. Without significant asset sales or an increase in house sales, cash flow remains a critical concern. State-owned companies like China Resources Land and Poly Property are considered safer bets among market participants.
In summary, while the Politburo’s words initially sparked hope, foreign investors are eagerly waiting for substantive action to revive China’s struggling property sector. Clear and specific measures are needed to restore confidence and address the deep-rooted issues facing developers. Only through decisive actions can China’s real estate market witness a sustained recovery and regain the trust of investors.
