Indications of a China property resurgence

In October, the market recovered from the year’s low as news of regulatory clampdowns faded on the back of China's property tightening, indicating a further bottoming in the sector. Meituan was fined 3% of its 2020 domestic revenue as a penalty for unfair competition, although this was actually better than expected as Alibaba was fined 4% of 2019 domestic revenue. This removed a significant portion of the sector overhang.

Monthly Fund Commentary
18 Nov 2021

In October, the market recovered from the year’s low as news of regulatory clampdowns faded on the back of China’s property tightening, indicating a further bottoming in the sector. Meituan was fined 3% of its 2020 domestic revenue as a penalty for unfair competition, although this was actually better than expected as Alibaba was fined 4% of 2019 domestic revenue. This removed a significant portion of the sector overhang.

Externally, tapering concerns in the US also eased with the US 10 Yr bond yield retreating. The MSCI China Total Return Index edged up 3.2% while the CSI300 climbed 0.9% during the month. Sector-wise, New Energy Vehicles (NEV) and Internet outperformed, while Sportswear, Property and Property Management underperformed the market.

The trading of Property stocks remained volatile on the back of mixed signals. On one hand, the regulator urged banks to speed up mortgage approval and mortgage rates in some cities began to come down. On the other hand, the government announced an expansion to the pilot program on property tax from two to twelve cities.

Nationwide property sales improved slightly in October, with a 20% YoY drop (excluding Evergrande) compared to around 27% YoY decline in September, rebounding 7% MoM. The contagion of Evergrande woes spread to mid-sized developers, Fantasia and Sinic were the next to default on USD bond repayments in October.

We expect more defaults will follow if the government maintains a tight grip on property policy. On a positive note, China Evergrande averted default again with a last-minute payment of an overdue coupon.

China Q3 GDP growth was reported at 4.9% – which was below market expectations, slowing further from 7.9% in Q2. Property tightening, COVID-19 resurgence, power rationing, floods and regulatory clampdowns all played a part in contributing to the disappointment. September PMI dipped below 50 to 49.6 for the first time this year.

We expect Q4 GDP growth to weaken further due to the lingering impact of the adverse factors mentioned above. We are of the opinion that policy on property is finally at an inflection point as the regulator has started sending positive signals to the market. We believe the government will step up easing to avoid further bond defaults from developers.

The Strategic China Panda Fund was flat in October, compared to +3.2% for the benchmark. The overweight in Property and Shipping sectors and the underweight in the Internet sector contributed to the underperformance. Green shoots are emerging in the Property sector. Given the position in quality property names, the Fund should benefit from policy easing.

As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.

Adam TurbervilleAdam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com

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The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 15/11/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.