Although domestic home sales are rising, the road to recovery for the Chinese real estate sector remains uneven, given the slower than expected recovery of the Chinese economy.
After a satisfactory growth in contract sales in March, we have seen a slow growth in sales in the first week of April and May. Not surprising, as buyer confidence is yet to fully recover and many are waiting. Buyers will respond most if confidence in economic growth increases and home prices remain stable or increase. However, despite the fall in real estate bond prices, we believe the recovery in the Chinese property market is on track. We also believe that some companies with exposure to this sector will recover faster than others.
The latest data on the Chinese Consumer Price Index (CPI) and Producer Price Index (PPI) and the debt situation point in the direction of deflation for China and indicate a slowdown in economic growth. While the US and Europe are busy fighting inflation, China may face deflationary challenges similar to what Japan has experienced in recent decades. The Chinese government has the need, incentive and ability to adopt more accommodative policies, including loosening monetary policy, to boost the economy and employment. These policies are favorable for the real estate sector, which is of vital strategic importance to China’s economic development in 2023 and 2024, especially when all three drivers, ie net exports, consumption and investment, register moderate growth.
separate the wheat from the chaff
The market continues to see developer defaults: KWG Group and Jiayuan, another struggling company, have recently been ordered into bankruptcy by Hong Kong courts. While the Jiayuan liquidation came as no surprise and should be a positive for debt restructuring cases prevailing in the Chinese bankruptcy sector, the KWG Group and Dalian Wanda incidents demonstrated that private company developers need time to fully recover. Obviously, these events caused a lot of selling and volatility in the market in recent weeks.
We believe that the recent decline in real estate bonds is of a technical nature and that the correction in bond prices of some developers can be reasonably explained by improving fundamentals. It reminds investors to take a good look at a company’s fundamentals.
Financial markets remain indifferent to China’s economic recovery
China’s economic reform continues to make progress since the government adopted COVID policies in late 2022. After five months of full reopening, the data is abundant and shows a tangible economic recovery. The country’s GDP grew 4.5% year-on-year, or 9.1% on a seasonally adjusted annual basis. There has been a surprising recovery in domestic demand leadership, as was the case after most parts of the world reopened after the pandemic. However, despite evidence of a strong recovery and that the housing crisis is finally reaching a resolution stage, Chinese financial asset prices have failed to reflect the outlook for recovery. We believe that patient investors who keep an objective eye on ongoing economic trends and make careful selections can pay off over time.