China Tells

The China Market this week started with a sell off on the equity market, mainly due to the property sector’s reaction to State Council’s crack down, along with some ripple effect from the volatility in the US market (SEC’s allegation against Goldman).

According to the document released by State Council, the government is taking the following measures to cool down the property market mania:

1)      The minimum initial deposit requirement for the first apartment is increased from 20% to 30%

2)      The minimum initial deposit requirement for the second apartment is increased from 40% to 50%

3)      The minimum mortgage interest charge for the second apartment is increased to 110% of the benchmark rate

4)      The banks have discretion to refuse house loan application for the third apartment

5)      The government is investing in the low cost housing to boost house supply to the low incomers – but these houses will come to the market in at least 3 years to give an optimistic estimate

6)      The government will try to impose the property tax in Beijing, Shanghai, Chongqing and Guangzhou. It is still not clear as to when to start the property tax and the details. The market is speculating on all kinds of possibilities such as to tap the property tax from the second house onwards.

Some self claimed professional property speculators interviewed dub the above as useless to the speculative activity in China’s property sector. To start with, it is not a very difficult task to get multiple IDs in China to buy property. You either pay for it or engage a relative to register as the owner of the house. Therefore it remains questionable on how effective the above first and second measure will be in curbing the speculation. The third measure could have some negative impact. In fact, CHINATELLS hears that some banks have already tightened the mortgage lending rate. Initially the applicants can enjoy a 30% discount of the benchmark rate on the mortgage loan. Recently, however, the best one can get is 15% discount. As to the fourth measure, the discretion at the local bank level leaves a wide open flexibility on the execution. As to number five and six, there will not be any near future effect.

Nevertheless, the market reacted with a cautious sell off, most severely in the property sector. Given the low leverage ratio of most Chinese property buyer and the banks, however, it looks hardly like the beginning of the bubble burst, let alone the collapse theory advocated by some China Bear. CHINATELLS would be surprised to see the current correction to continue with any sustainable length in terms of durability and depth.

To follow the story in the property sector comes the news from the banking sector. CMB, Bank of China, ICBC, and Citic progressively released their Q1 report one by one. Not surprisingly, most banks report aggressive growth in both revenue and profit. Such a result shall thank partially to the record amount of loan that Banks lent out in 2009 (bigger base volume on an interest spread), and partially to the improving macro environment (Banks are in a good position to select customers with better credit condition and charge a higher premium on the loans). The market seems very optimistic about the growth of Chinese banks and values the share price with a hefty premium on growth (See Chart above). On the other hand, bankers waste no time in taking this opportunity to raise capital that is most needed to secure their CAR. According to the latest estimate, China Banks are likely to raise a total of 50 billion USD (including 20 Billion for ABC) in 2010, which accounts for 34% of the current afloat capitalization of banks on Hongkong market. Such an outlook is probably another reason why every market rally seems so heavy and dragged down sooner or later.

Last but not least, this week also marks the opening of Expo 2010 in Shanghai. CHINATELLS has covered this topic in last week’s bulletin, and wish Shanghai the best for the grand event.