China Property Stocks `More Attractive' to Martin Currie After Loan Curbs

Chinese property stocks, the nation’s worst performers this year, are becoming “more attractive” after government curbs on bank lending drove valuations to a year-low and made interest rate increases less likely, Martin Currie said.

“Property stocks are more interesting,” Chris Ruffle, who helps manage $19 billion as China co-chairman of Martin Currie, said in a telephone interview from Shanghai. “This means the government won’t use rates to a great extent. Inflation will not take off,” he said.

The SE Shang Property Index lost 2.2 percent today, extending yesterday’s 6.8 percent fall and bringing this year’s decline to 19 percent, the most among the five industry groups. The measure now trades at 22.8 times reported earnings, the lowest since March 2009, according to data compiled by Bloomberg.

China told banks to stop loans for third-home purchases in cities with excessive property price gains, the State Council said on April 17. The government also this year ordered banks to set aside more deposits as reserves and raise mortgage rates.

The nation’s equities plunged the most in almost eight months after the announcement. The Shanghai Composite Index fell 4.8 percent, while the CSI 300 Index slid 5.4 percent. Both the Shanghai Composite and CSI 300 ended little changed today.

Policy Risk

“I think policy risk will be with us as long as property prices are squeezed upwards due to lack of supply,” said Howard Wang, head of the Greater China team at JF Asset Management, which oversees about $50 billion. “Unless one assumes there is a hard landing in the physical market -- and that’s possible if not probable -- the equities seem to reflect a pretty pessimistic scenario.”

Shenyin & Wanguo Securities Co. analysts led by Zhu Anping said today investors should avoid stocks related to the property industry as earnings at developers may deteriorate and policy uncertainty weighs on sentiment.

The prospect of higher borrowing costs has pushed down stocks in 2010, making the Shanghai Composite Asia’s worst performing index with a 9.1 percent loss. The gauge surged 80 percent last year. China’s consumer prices rose 2.4 percent last month, less than economists’ estimates and Premier Wen Jiabao’s target of 3 percent this year.

Administrative Measures

Economists are split on the timing of the nation’s first interest-rate increase since 2007. Royal Bank of Canada said higher rates are likely this quarter and could come this month, while Bank of America-Merrill Lynch sees no move until the fourth quarter.

“The recent measures make it more likely that that government will use administrative measures rather than interest rates” to ease real estate prices, said Ruffle, whose Martin Currie China A Share Ltd. fund has beaten 99 percent of rivals over the past five years, according to data compiled by Bloomberg.

China Asset Management Co., the nation’s biggest mutual fund company, bought developers in its flagship fund in the first quarter, predicting “gentle” tightening this year, according to the company’s Web site.

Previous government measures failed to slow gains in housing prices, which rose at a record 11.7 percent in March. Hedge fund manager James Chanos said this month China is “on a treadmill to hell” and that the real estate is a bubble that may burst as early as this year.

Morgan Stanley analyst Jerry Lou recommended yesterday that investors avoid property, banking and construction material stocks, saying the “austerity” measures may be negative in the near term.

Property Agents

Jun Ma, Deutsche Bank AG’s Greater China chief economist, yesterday called the new property measures “draconian” and said prices of mid- and high-end properties may tumble 20 percent.

Ruffle, who was bearish on property late last year and into early 2010, said he was “looking” at buying real-agent agents because they will benefit from rising transaction volumes even if prices decline. He likes Hong Kong-listed Hopefluent Group Holdings Ltd. and recently bought shares of Shanghai-based E- House China Holdings Ltd.

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