Chinese equity markets this morning were more “buzzy” than a hive of boozed-up bees! The turnover on everything related to China was up significantly. I think this probably necessitates a technical analysis summary after the trading is done on futures in Hong Kong later tonight, but until then there are a lot of different data to bite into.
There are two major things I will look into here. First and foremost, there are the China property developer stock drivers: Bloomberg is reporting on how property developers will see a double-stacked sandwich of gains from the PBOC policy. Second, there is the strong interest in China from US ETFs being reported on as well, with rather big ETF premia, also reported by Bloomberg.
While the ETF discussion is rather simple, focusing on the quota restrictions and trading day mismatches allowing rather big market close disparities to appear between New York and Shanghai, it does highlight the probable maintenance or increase in the Northbound link turnover on the Shanghai – Hong Kong Stock Connect until overall quotas are lifted. Additionally, it looks like there will be a market for continued QFII quota expansion going forwards. The property developer information is much more interesting, so please read on for more!
Double effects from the interest rate cuts:
As mentioned yesterday, there is the expectation leverage from the rate cut: if policy will be looser going forwards, then there should be less reason to fear near-term falls in the property prices, and buyers might thus look to come to market and fulfill that prophecy rather before any strong policy action needs to be considered. China is thus seeing 40% of prospective home buyers moving up their purchases to try to tag the property price bottom here temporarily, before prices start rising again in earnest. This will probably not be seen so much in price overall in China, given the massive oversupply that Bloomberg reports on. What will likely happen however is that property prices might go up more than analysts estimate when the data comes out – mostly due to the fact that investors / households will buy properties in attractive areas, probably creating a price increase generally due to pushing attractive properties up, while the inventory will still be big as less attractive areas will still see supply warrant pricing that the developers are unwilling to sell at.
I really don’t think the analysts will get it right on their recommendation that developers should look to cash out and clear inventory before reloading and producing more property, although that would be better for the economy. “Better” or “worse” are however rather silly constructs here – if no one wants the property anyway, it’s probably better to squat on it for a while and enjoy cheaper loans for new developments that people actually want, since there seems to be pent-up demand.
What does the financing picture, which underlies these loans and those sought by households to go into the property market, look like then? First, the 5+ year loan benchmark from the PBOC was lowered from 6.55% to 6.15%, in line with the overall 40 basis point cut in the lending interest rate. Given that Chinese banks on average ask for a mortgage interest rate of 6.96% from consumers, it could be very reasonable that this could also fall. I do expect this fall to not be 40 basis points, but probably stabilize somewhere around 30 basis points depending on the bank, given that deposit rates have not fallen as much, and that individual banks might have different arrangements. Then again, the different policies will interact here, and the analysis will look really muddy.
Chances are that between potential reserve requirement ratio cuts, bank capital recalculations, pressure to lend more overall, plus the lowered risk in the property market, the effective average mortgage rate demanded by banks could fall between 50 and 60 basis points for new first-home loans. Expectations in the article outline that some Shanghai banks are forecast to expand first-home loans discounts from 5% to 10% next year, and that alone would be a 30-35 basis point cut from current levels! If interest rates are cut further, I wouldn’t be surprised to see end-2015 property mortgages for first-time buyers priced in the interest rate range of 5.5% – 5.8%.
If the loan market overall gets cheaper, then I do believe that China’s data will truly highlight the size and disparity of China. Bocom International disagrees with my expectations of widened discounts, but I believe that having the consumers as full-service customers will mean that banks will try to offer different incentives to attract homeowners and keep their deposits, investment and transaction business through virtue of the property loans, and providing first-time buyers a reason to be loyal to the bank for a long time is a rather inexpensive investment if it costs 30 basis points on today’s mortgages and you expect the benchmark short-term rates to fall further. Offer discounts today to get people “in the door” quickly, then if the short-rates fall, sit back and enjoy the difference and the true power of lend long, borrow short!
Property developers themselves are also seeing another interesting effect from this: lowered funding costs will possibly decrease their payouts by RMB4.6 billion next year! If sales are up 5% as expected by CICC, then the overall net income could be growing at close to 10% overall!
Property is one of the recent few years’ main drivers of the Chinese economy, and if the market becomes less reliant on debt and instead goes into equity financing and more easily visible balance sheet products, then this will probably funnel money to the Chinese consumer. Now we’re talking interesting developments here, and I can’t wait to see this play out!