SinoInsight 1
China’s A-shares rose for four consecutive days this week. Trading on the Shenzhen and Shanghai indexes broke the trillion-dollar mark for two consecutive days, with over 200 stocks reaching their daily trading limit. The Shanghai Composite Index broke above 3,100 points, a 3.75 percent increase over four days.
Amid the “bull market” in Chinese stocks are signs that things are not as they seem.
On March 7, northward net outflows on the Shanghai-Hong Kong/Shenzhen-Hong Kong Stock Connect reached a high of 3.97 billion yuan ($591.23 million). In particular, the Shanghai-HK Stock Connect saw 2.55 billion yuan in net outflows, with net outflows on that trading day being nearly three times that of the previous trading day. Net outflows from the Shenzhen-HK Stock Connect was 1.42 billion yuan, ending a record 26 consecutive days of net inflows. The March 7 northward net outflow amount was the 10th largest in a single day since the inauguration of the Shanghai-Hong Kong/Shenzhen-Hong Kong Stock Connect in 2014.
Meanwhile, there have been as many as 1,330 announcements related to the reduction of A-shares in 2019 as of March 7. No less than 379 public companies have issued 688 share reduction plans, with the biggest reduction totaling 7.276 billion shares (total value of 74.017 billion yuan). According to statistics by Chinese financial service provider Wind, major shareholders reduced a net of 568 million shares (total value of 11.736 billion yuan) so far this year.
OUR TAKE
1. We believe that Chinese stocks are seeing a technical “bull market,” and not “the real thing.” Given the overall worsening of China’s economy, Chinese public companies do not have the economic fundamentals to keep the “bull market” alive for long.
2. There could be two reasons why foreign investors and major shareholders are reducing their holdings. First, the financial situation of major shareholders might not be healthy and they are seriously in need of funds. Second, both foreign and domestic shareholders are feeling pessimistic about China’s economic prospects and have decided to cash out while the markets are rising.
3. China’s stock markets have a reputation of being like casinos, and Chinese shareholders are known to treat investing as gambling. Hence, China’s “bull market” is likely to be highly speculative and volatile. We believe that this “bull market” will prove difficult to sustain. If the “bull market” crashes, the deteriorating real economy will take another hit.
4. It would be good news for the “bull market” if China and the United States can seal a trade agreement in March. However, the first quarter results for public companies that will be released before April 30 will be a major test for the “bull market.”
5. In our China 2019 outlook, we noted that the U.S. may raise tariff rates before June and may impose additional tariffs in the second half of 2019. If our forecast proves accurate, then the current “bull market” is destined to be short-lived.
SinoInsight 2
On March 6, the Housing and Urban-Rural Development Bureau of Yinxian District in Jiangxi Province issued an urgent notice which barred local property companies from selling property at reduced prices.
The contents of the urgent notice include:
1. All property firms must immediately cease “special sales” of apartments and must first seek approval from the Housing and Urban-Rural Development Bureau.
2. From March 3 onwards, all transactions involving sales of residential property at a lower price as compared to what they were sold for in February are to be put on hold.
3. All property companies should draw up plans to handle “emergency situations” involving reductions in property prices, and submit the plans to the Housing and Urban-Rural Development Bureau. (Note: “Emergency situations” likely refer to home buyers protesting after property firms sharply reduce property prices.)
OUR TAKE
1. This is not the first case of a local government preventing property companies from selling housing at reduced prices. According to the Ministry of Housing and Urban-Rural Development’s official website, local governments in Beijing, Gansu, Yantai, Zhengzhou, and elsewhere recently released statements about “cracking down on chaos in the property sector.”
In February, the Real Estate Chamber of Commerce of Zhangzhou City in Jiangsu Province issued a notice on “property sales chaos” in the city. The notice said that “a certain developer’s” slashing of prices by 2,000 yuan per square meter had severely disrupted order in the property market.
In March, the Market Regulation Bureau of Nanxun District in Zhejiang fined a property company 200,000 yuan for offering a lucky draw to its customers to drive property sales.
2. We believe that the CCP’s “monetization” of shantytown redevelopment projects and China’s weakening economy are the reasons why property companies are trying to slash prices or finding ways to drive sales in Yinxian District, Zhangzhou City, Nanxun District, and other third and fourth-tier Chinese cities.
The central authorities “monetization” of shantytown redevelopment projects in 2016 triggered a sharp rise in property prices in third and fourth-tier cities. In June 2018, however, the authorities appeared to pull the breaks on the “monetization” scheme. In 2019, many third and fourth-tier cities made adjustments to or even scrapped their shantytown redevelopment projects.
According to data from Wind, the four leading Chinese property companies (Evergrande Group, Country Garden, Vanke, Sunac) made total sales of 149.08 billion yuan in January, a 33.38 percent decrease from the same period last year. Country Garden’s sales area was nearly 50 percent as compared to a year ago, while Evergrande’s sales area fell by almost 40 percent.
On Feb. 28, Evergrande announced a 10 percent discount on its property prices countrywide. According to mainland media reports, Evergrande staff are entitled to an additional 5 percent discount plus another 30,000 yuan off on top of the final discounted price. Financial analysts calculated that the buyer of a 1 million yuan home could end up paying only 637,000 yuan (after adding a loan mortgage discount), or a 36.3 percent price reduction.
In our China 2019 outlook, we wrote that “property prices will likely fluctuate drastically (small spurt in prices followed by sharp drops),” and prices “in some areas may fall by as much as 30 to 50 percent.”
The trend which we forecasted appears to be currently unfolding in China’s property market.
