China’s foreign exchange reserves slumped nearly US$90 billion in November alone.
Also, the Hang Seng Index has tumbled to 21,800.
Meanwhile, Bank of Jinzhou (00416.HK) is seeking to raise funds and a US insurance company has sold its stake in a mainland insurer.
All this bad news should have been priced into Chinese stocks but it appears the market is running under its own steam.
Consider China Vanke Co. (02202.HK).
The nation’s largest property developer is on a roll, leading a multi-day rally.
State-owned China Resources Group already holds a 15 percent stake in the developer.
However, Vanke’s fragmented shareholder structure has tempted Foresea Life Insurance and others to attack the company.
The stock surged nearly 15 percent last week in Hong Kong thanks to a stake purchase by Foresea Life Insurance and a 30 percent rally in Shenzhen’s housing prices.
It seems Beijing has started to gradually relax its grip on the property sector.
The question is, will the property market bottom out anytime soon?
In fact, the ups and downs in housing prices are a monetary phenomenon rather than an economic event.
In the past decade, money supply, or M2, has expanded more than 20 percent, helping drive up property prices in the so-called “golden era”.
However, since Beijing stopped printing money to stimulate growth, money supply growth has fallen year after year. M2 was up 13.5 percent in October.
So, how could housing prices continue to soar after a decade-long rally?
Various policy relaxations are in fact aimed at a soft-landing for the property market rather than at reigniting a housing bubble.
By contrast, housing prices in Shenzhen have seen sharp gains in recent years amid an influx of technology companies and entrepreneurs.
As a result, Shenzhen is well on its way to pulling up to other first-tier cities such as Shanghai and Beijing.
Deflationary pressure is a concern for China’s property market but not in the scale it that affected Hong Kong.
Hong Kong’s M2 growth fell to zero in 2003 from 5 percent in 2001.
That precipitous decline is unlikely for China but deflation will shrink domestic capital demand and M2 may not rebound dramatically anytime soon.
Money supply and housing prices are both likely to fall back gradually, rather than bottom out.
In terms of valuation, the P/B ratio of Vanke is more than two times while that of Sun Hung Kai Properties (00016.HK), Hong Kong’s largest property developer is 0.6 times.
Does Vanke’s current valuation offer sufficient margin of safety for investors?
It’s uncertain if the recent strong gain in China’s property sector is a sign things are bottoming out or just a temporary blip.
Meanwhile, the fight for control of Vanke may push up its share price.
For long-term investors, Vanke remains attractive.
It has beaten inflation most of the time. However, investors should hold out for better timing maybe next year or later.
This article appeared in the Hong Kong Economic Journal on Dec. 9.
Translation by Julie Zhu
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