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