Credis Suisse Asia Equity Focus Tightening bias in China property is reinforced

China property: Hopes of policy loosening proves premature
There has been plenty of news flow on the China property sector lately. Yesterday,
Reuters reported that the China Banking Regulatory Commission (CBRC) had
requested banks tighten mortgage lending by stopping approvals of third-home
mortgages in overheated first tier cities, namely Beijing, Shanghai, Shenzhen and
Hangzhou, and increase the third-home mortgage rate to 1.5x of the benchmark
rate (from the market norm of 1.2x previously). In response to the Reuters news
report, CBRC last night issued an announcement reinforcing its tightening stance,
indirectly confirming this news item. It has also been reported that Chinese banks
must now undertake another stress test, assuming a 60% property price correction
(vs. 30% in previous tests). According to the China Securities Journal, the Ministry
of Land and Resources has also performed an investigation and identified 1,457
pieces of unused idle land in the country. Guangzhou and Beijing have the largest
share of unused land. This could lead to 80% of the plots being repossessed. The
list might be passed to the CBRC for risk assessment and blacklisted developers
may be prevented from obtaining bank loans.

All this negative news flow hit hopes of a policy easing, sending major China property stocks 3%–5% lower yesterday. It is our strong belief that property policies
are unlikely to be reversed until we see a meaningful property price correction. The
recent sharp rebound in transaction volumes (e.g. Beijing +111% WoW), the re-emergence of new "land kings" (e.g. Sino-Ocean in Shanghai) and the rising expectation of a policy loosening are the key reasons that are prompting the central government to reinforce its tightening bias. This kind of reinforcement will continue in the near term, if necessary.

In our view, the recent relief rally in the property sector may have come to an end. Although the investment limit on commercial property by Chinese insurance companies was recently confirmed at 10% of total assets (from previous market talk of 5%), this
should not be interpreted as a major loosening as 1) insurance companies are still not allowed to directly invest in property development projects and 2) the initial investment is expected to be very small. The mixed news flow is in fact a reflection of the government's current dilemma – on the one hand, the property tightening since April has met with little success and probably needs further reinforcement, while, on the other, the recent economic data suggests a rising growth risk. If the physical market rebound (both in volumes and prices) continues, the central government may be forced to implement another round of property austerity measures. Expectations of a looser property policy may prove later to be overoptimistic. We expect the news flow to remain mixed and to increase the volatility of China property stocks, with a near-term trend biased towards the downside.

In the upcoming interim results, developers are likely to report a material jump in reported earnings on a year-on-year basis due to the low base effect, but this should be expected by the market. Frequent fund-raising exercises lately, including placements (e.g. Longfor Properties, Poly HK), the exercise of options (e.g. Evergrande) and bond issuances (e.g. KWG, Sino Ocean, Yuzhou Properties, etc.), by Chinese developers may weigh on sentiment again. We maintain our neutral stance on China's property sector due to the policy overhang and the inventory risk in H2. For short-term investors, we suggest they take profits on China property stocks now and for long-term investors, we suggest they wait for a lower re-entry level to add quality names, such as China Resources Land (1109 HK, HOLD), once again to their portfolios.