HONG KONG'S Hang Seng Index closed down 1.4% at 20,811.36 today on concerns over tighter property lending in Mainland China. This is after Hong Kong’s benchmark index rallied on Friday by 1.6%.
Meanwhile, the Shanghai Composite, China’s chief index for A shares, is closed today in observance of Labor Day, but inched up 0.08% on Friday after losing 3.3% for the week.
Analysts said the main culprit in last week’s general weakness and today’s selloff in Hong Kong was yet another reserve requirement ratio hike in China, which makes it harder for banks to lend to the fast-growing real estate sector.
China said yesterday it would raise its reserve requirement ratio for banks by 50 basis points from May 10.
The announcement raises the standard reserve ratio for major banks to 17% of deposits, though the rate can vary for each bank.
While investors and homebuyers don’t seem all too worried about the white-hot property sector in China, the People’s Bank of China (the country’s central bank) is definitely taking notice, as evidenced by its most recent credit tightening measures.
These concerns are finding their way into financial reports in the form of cautionary language.
As one example, China Vanke, the country’s largest listed developer, recently announced that its first quarter profit shot up by 46.5% year-on-year to 1.13 bln yuan, the fastest such pace in three quarters.
However, this stellar growth, coupled with chronic tightening measures by economic regulators, led the real estate firm to warn that it expected much slower growth for the remainder of this year due to restraints on lending in China.
The move to raise the reserve requirement was not unexpected as most analysts believe there was more wiggle room in this area before the more drastic measure of raising interest rates was employed.
House of Cards?
At least one renowned investor shares Beijing’s concerns that the apparent link between rising profits and property prices was unsustainable – and potentially treacherous.
Investor Marc Faber said China’s economy will slow and possibly “crash” within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst, according to a report by Bloomberg.
As proof of the fragility of Chinese shares, Faber pointed to the benchmark Shanghai Composite Index, which has failed to regain its 2009 high while industrial commodities and shares of Australian resource exporters are acting “heavy.”
The opening of the World Expo in Shanghai last week is “not a particularly good omen,” Bloomberg cited Faber as saying, pointing to historical weakness in host-country economies.
“The market is telling you that something is not quite right. The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months,” Faber told Bloomberg.
The report said Faber joins hedge fund manager Jim Chanos and Harvard University’s Kenneth Rogoff in warning of a crash in China.
China is “on a treadmill to hell” because it’s hooked on property development for driving growth, Chanos said in an interview last month. As much as 60% of the country’s gross domestic product relies on construction, Bloomberg added.
However, the ride is not yet over for the sector, but the piper may come calling as early as this month.
Great Wall Securities analyst Liu Kun has predicted another 20% rise in nationwide property prices before a turning point is reached, probably in May, while other analysts say prices may rise for another six months to a year.
The fallout from the tighter credit in China, as well as reception to Greece’s IMF recovery package, are likely to influence both the Hang Seng and A shares this week, analysts said.
Analysts said they expect the Hang Seng index to trade in a range of 20,500 to 21,200 this week.
See also: CHINA SHARES: Keep an eye on property, new financial instruments
