China Property Stocks Surge 14% on Govt Buyout News

Key Takeaway

• Chinese property stocks surged, with a Bloomberg gauge hitting its highest since December 2023, on news Beijing may buy unsold homes to aid developers.
• The potential government purchase plan sparked a 14% rally in real estate shares despite concerns over local government and bank debt levels.
• China's policy adjustments include potential reserve ratio cuts and measures to support Hong Kong's market amid the real estate downturn.

Market Optimism on Policy Support

Shares of Chinese developers experienced a significant surge following optimism that Beijing will extend policy support to purchase unsold homes from distressed builders. A Bloomberg gauge of Chinese real estate stocks rose to its highest level since December 2023, with notable companies like Longfor Group Holdings Ltd. and China Vanke Co. seeing substantial gains. This optimism stems from considerations by China to have local governments buy millions of unsold homes, a move that could mark one of the most ambitious attempts to rescue the property market. While the plan's details and feasibility are still under discussion, the potential to "expand the scale" of purchases has been positively received by analysts, including JPMorgan Chase & Co.'s Karl Chan, despite skepticism about the plan's scale being sufficient for a recovery.

Economic and Market Reactions

The announcement of the potential government intervention to purchase unsold homes led to a rally in Chinese property stocks, with a 14% increase signaling investor optimism towards government measures aimed at stabilizing the real estate sector. However, concerns remain regarding the financial strain this plan could place on local governments and banks, already burdened by high levels of debt. The real estate sector's downturn has significantly impacted the economy, with home sales plummeting and unsold housing inventory reaching an eight-year high. In response, China is considering policy adjustments, including a potential reserve ratio cut and measures to support Hong Kong's market, to address capital outflows and liquidity issues.

Policy Adjustments and Strategic Measures

In light of the liquidity squeeze and to stabilize market sentiment, China is adjusting its monetary policy and financial market strategies. This includes halting the sharing of real-time foreign flow data and implementing measures to enhance Hong Kong's financial market, such as a dividend tax exemption for individual investors. These policy shifts aim to support the economy amid the challenges posed by the real estate crisis and capital outflows. The People's Bank of China is expected to cut the required reserve ratio to manage these issues further, alongside efforts to prevent the yuan's further weakening.

Street Views

• Karl Chan, JPMorgan Chase & Co. (Neutral on Chinese real estate stocks):

  "The possibility to 'expand the scale' could potentially be exciting... We are still skeptical about whether the scale is large enough to trigger a recovery, but directionally this looks like the right move."

• Raymond Cheng, CGS International Securities HK (Bullish on Chinese property sector):

  "The move, if implemented, is an important step to rescue the sector as it could address excess inventory and developers’ liquidity issues."