Market Views: Longer-term impact of China's property stimulus
Chinese authorities recently announced a slew of policies to buoy a slumping housing market.
Chinese banks trimmed existing mortgage rates by up to 25 basis points. The People's Bank of China (PBOC) lowered nationwide minimum down payment requirements to 20%- 30% for first-time and second-time homebuyers, from up to 80% for second-time buyers.
Moreover, top-tier cities, including Guangzhou, Shenzhen, Shanghai, and Beijing, all announced that they will now treat households that have mortgage records but don't own a house as first-time buyers.
All of these measures led to a big jump in home sales in tier-1 cities over the past weekend.
Meanwhile, property developer Country Garden also narrowly avoided a default after it paid coupons and extended some repayments -- this and the measures outlined above led to a rally in property developer shares this week.
By the end of Thursday, Country Garden rose by 20%, while Sunac China Holdings skyrocketed 164%. Shares in China Evergrande Group also soared 133%.
Despite the enthusiasm, uncertainties remain over the sustainability of home sales recovery, and whether this can translate to a broader resolution of the protracted property crisis and stronger economic recovery.
AsianInvestor asked fund houses what their outlook is for China’s beleagured property sector given recent developments.
The following responses have been edited for clarity and brevity.
Aninda Mitra, head of Asia macro and investment strategy
BNY Mellon Investment Management
China’s recent easing of property market measures is a good beginning.
It shows that the authorities are starting to “walk the talk”. The easing of restrictions in tier 1 cities is already eliciting the most “bang for the buck” as the desirability of and demand for properties in these areas is quite high.
We expect these measures will start to speed up home sales, boost cash flows for developers and, possibly, even push up the sequential pace of new housing starts in the coastal cities.
But the big question is to what extent will it help lower-tier cities, and whether it will drive a strong recovery in the overall economy.
These are areas where we remain somewhat doubtful.
To begin with, some degree of stimulus, including an easing of housing restrictions, was already incorporated in our base case.
So, the past weekend’s steps do not materially improve the fundamental outlook per se, though it has provided a much-needed boost for market sentiment.
The broader challenge for China, looking ahead, is that there are still a lot of unfinished and undelivered properties in tier-2 and lower tier cities.
On this front, there is much to be done for managing the scale of or containing the fallout from the rising risk of developer defaults and their ongoing credit distress.
How these play out will impinge on suppliers and contractors, local governments, regional banks and households.
Our sense is that Chinese authorities are treading a thin or thinner line between delivering calibrated stimulus, including easing of property restrictions, to meet this year’s 5% growth target, but also not engineering a housing market bailout of a scale that sparks much wider moral hazard.
Zhu Chaoping, global market strategist
JP Morgan Asset Management
The intensive introduction of property policies is symbolic, which aroused investors’ expectation for a turnaround to a more pro-growth policy stance.
However, we remain cautious about the sustainability of the policies’ impacts.
New measures to cut down payment and mortgage rate make it easier for home buyers aiming to replace their old property for better living conditions.
Property market liquidity in tier-1 cities might pick up in the next couple of months when such pent-up demand is released.
However, after this wave of replacement-driven growth, the lack of incremental demand might become a new challenge to property sales and price.
As a result, continuous escalation of policies is necessary. The government might launch another shanty town redevelopment initiative, similar to that in 2015.
This could be facilitated by low-cost funding from the People's Bank of China and policy banks, and directly pump up liquidity and demand in the market.
This could help avoid quick declines in property value, and hence keep local governments and developers afloat. However, the leverage ratio in the economy might also increase, which could only be resolved with sustainable economic growth driven by fundamental reforms.
Cary Yeung, head of Greater China debt
Pictet Asset Management
The recent easing measures should be effective in supporting the property market and the broader economy.
Following the weaker-than-expected activity data in July that was released in August, growth momentum may slightly improve, evidenced by better-than-expected PMIs.
Anchored by targeted policy measures, fundamentals in the fourth quarter are likely better than the previous two. Risk assets may remain volatile as it takes more measures and a longer time to restore confidence.
China dollar credits, especially high yield, were trading at wide levels compared to global peers given the impact of the high yield property turmoil, while there’s little impact on investment grade corporates in China whose fundamentals remain solid, and they are increasingly favoured by investors who turned cautious on China property.
Technical-wise, China investment grade credits remain well supported given the lack of new issues. We continue to find opportunities in selective sectors within the China dollar credit universe, such as TMT, industrial and selective state-owned enterprises (SOEs).
We expect to see further steps such as another 25 basis-point reserve requirement ratio (RRR) cut; to protect banks’ margins, PBOC is unlikely to further guide down deposit rates.
Nonetheless, liquidity should remain ample in the front end and yields thus stay under downward pressure, especially in the short end.
We see the potential for onshore credit spreads to further tighten as limited at current levels given these have already come a long way this year.
Yan Aijing, investment analyst of Asian equities
abrdn
The recent easing measures in the housing sector reiterate that policy support remains robust in China.
Despite being piecemeal and relatively slow, it demonstrates the government’s intention to boost consumer confidence, which should benefit economic recovery and real estate.
It will take time for any meaningful momentum to show up in the property sector.
Following three years of lockdowns, confidence among Chinese consumers – who have historically been savers than spenders – is relatively low, despite building up excess household savings in recent years.
We believe as employment and income prospects gradually improve in China, domestic consumption will pick up pace. This includes big-ticket purchases such as buying a house.
While we expect weak property sales to remain a near-term risk for the sector, it is unlikely that there would be any disorderly unwinding among developers.
It is unlikely that we would see any big-bang stimulus measures to bolster sales as the government remains mindful of overheating in the property market.
Further demand-side and supply-side support is again likely to be measured and targeted. In short, the property sector will gradually improve with time and would likely be one of the last sectors to recover in the economy.
Shao Ping Guan, head of China equity
Allianz Global Investors
The Chinese equity market recovered somewhat after the government’s announcement to lower down payments and cut interest rates on existing mortgages.
But the question is – will this kick-start a rapid real estate recovery? Unlikely, in our view.
On the other hand, we also do not expect an extreme downturn in the property market as we believe targeted and measured resources will continue to be mobilised to prevent this.
As more concrete government support measures are implemented, this should lead to significant improvements in market confidence.
China’s reforms are designed to wean its economy off the property sector given the structural change in demographics, where slowing population growth implies fewer houses will be needed in the future.
China also cannot sustain higher levels of leverage in the sector and is unwinding excesses from years past.
Overall, while property has been instrumental in building China’s economic success, we believe the sector is now set for a period of structural decline.
China needs to look towards a more diversified set of future growth drivers – in areas such as innovation and technological advancement; a more modern, self-sufficient manufacturing base; and a vibrant private and services sector.
As long-term investors, we continue to focus on those areas of the market where we find structural growth tailwinds.
These areas are plentiful at the bottom-up level and include artificial intelligence (AI), big data and digitalisation, electric vehicles, industrial upgrading, domestic consumption, beneficiaries of financial market reform, and green technology and renewables.
Carol Lye, portfolio manager and senior research analyst
Brandywine Global
The past weeks have seen a slew of additional measures to help the property market.
The more effective measures include reducing the minimum down payment ratios for home buyers, relaxing the classification of first-time homebuyers and reducing mortgage rates.
This clearly shows that the authorities are signaling a focus on stabilising and reviving confidence in the property sector.
After all, property sector-related growth contributes to one-third of China’s GDP growth.
Given the challenges in the property sector, it is conceivable that the support measures could shore up confidence.
That said, we will need to see more evidence that the buying momentum will be sustained.
Also, upper-tiered cities make up 30% of China’s entire property market while tier 2 cities and below had already relaxed those measures beforehand and activity has still been a lull.
Therefore, while it could be that animal spirits have woken up, the Chinese government needs to put in place more measures to give confidence that property as an asset class is not in decline but retains its stability and value going forward.