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Property is in the sights of Chinese regulators. Here’s how it might play out

September 01, 2021

Investors expect China may turn its regulatory spotlight on property after tightening industries such as education. Pendal’s Samir Mehta explains the outlook

  • China seeking to reduce cost of living pressures on families
  • Property industry may be next in Beijing’s sights
  • Slowdown would have global ramifications

CHINA’s regulatory tightening of industries such as education, ridesharing, games and food delivery has sent shudders through global investment markets in recent weeks.

The policy changes — which aim to improve quality of life, redistribute income and relieve cost-of-living pressures among China’s most disadvantaged people — may go further with the giant property industry next on the list of investor concerns.

A tightening of property regulation leading to a slow-down in China’s real estate industry would pose a real risk for Australian investors given our commodity exposure to Chinese growth.

How might a China property slowdown play out?

What should investors be looking out for as they weigh these issues?

A real risk

Pendal’s Samir Mehta, who manages Pendal Asian Share Fund, says investors face a real risk that property is next in Beijing’s policy sights.

“There has been chatter around property, because buying a property or renting one remains one of the biggest outlays for an average family,” says Mehta.

“Disparities of income have led to significant real estate price appreciation, particularly in cities like Shanghai, Beijing and Shenzhen.

“There have been a few local articles that have talked about the rising multiples of annual income now required to buy an apartment.”

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Pendal Asian Share Fund

Regulatory intervention in China’s real estate market could take a number of forms such as:

  • Mandating affordable housing as part of new property developments
  • Restrictions on investment properties
  • New property taxes
  • Changing the way capital gains are taxed

Each of these could have serious ramifications for economic growth.

“This is a very tricky part of the economy because of the interactions between construction, property price appreciation and the way provincial and city governments raise revenue through land sales,” Mehta says.

“If China adjusted its policies there would be a noticeable impact down the whole chain.”

Residential property construction is an important component of China’s GDP, “so if property does come under the microscope, you should expect further slowdown.”

“Then there is mounting burden of debt in the system; a fair bit on the balance sheet of property developers and individual mortgages for residence or investment purposes.”

Impact ‘way beyond stocks’

“The impact could be way beyond stocks. Because you’re talking about a system that is built on GDP growth, built on construction, built on debt for that sector and revenues for the government. It’s across the board.”

As a major supplier of building materials including iron ore, Australia could endure the biggest impact of policy changes on China’s real estate.

Iron ore prices fell by a third in recent weeks as China slowed steel production to curb carbon emissions.

Changes to the Chinese property industry would put further pressure on the iron ore price.

What are the signs an investor should look out for?

Investors should watch Chinese retail sales, sales of property and credit growth as leading indicators of a Chinese downturn, Mehta says.

If there is evidence of slowing, investors should watch how China’s central bank responds.

The People’s Bank of China has been winding back stimulus — but they may change tack if Beijing’s policies start to affect property process and weaken the economy too much.

“The ramifications of a slowdown in China are going to be global in nature, and therefore it’s very important for the next three-to-six months to observe how the economy in China fairs,” says Mehta.

About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

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About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager.

This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at September 2, 2021. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.

This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.

The information in this article may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this article is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

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