China’s New Leaders May Introduce Property Curbs, BofA Says

China’s new government may introduce new curbs on the property market when it takes power in March, hurting the outlook for the nation’s equities, according to David Cui, equity strategist at Bank of America Corp. (BAC)

Chinese stocks may “hold up fairly well” in the next few months, with the Shanghai Composite Index trading in a range of 1,800 and 2,200, Cui said at a media briefing in Hong Kong today. The Shanghai index slipped 0.5 percent to 2,291.30 at the close. Xi Jinping and Li Keqiang are scheduled to be appointed as the nation’s next generation of leaders at the National People’s Congress in March.

The “potential negative triggers” for stocks are policies to restrain the rebound in real-estate prices and so-called shadow banking, Cui said. Data on Jan. 18 showed China’s new home prices rose in December in the most cities in 20 months, renewing concerns the government may issue new tightening steps.

“The sensitive period I would watch out for is after the National People’s Congress in early March when the new leaders are installed,” he said. “There may be a change in policy.”

In its almost three-year effort to tighten the property market, the government has raised down-payment and mortgage requirements, imposed a property tax for the first time in Shanghai and Chongqing, and enacted home-purchase restrictions in about 40 cities. China will likely keep its property policies unchanged in 2013, Eva Lee, an analyst at UBS AG (UBSN), told reporters in Shanghai on Jan. 15.

UBS Forecast

The Shanghai index has jumped 17 percent since approaching a four-year low on Dec. 3 amid signs of an economic recovery and on speculation urban development will increase construction demand. The CSI 300 Index has rallied 22 percent since last month, entering a bull market on Dec. 7.

The biggest threats to the market rally are property tightening measures and possibly faster inflation in the second half of the year, Chen Li, UBS’s head of China equity strategy, said in an interview at his office in Shanghai yesterday.

While China’s economic fundamentals have improved, the market’s gains will depend on liquidity, he said. Money may flow out of wealth management products into equities or property, Li said. He kept his forecast for a 20 percent gain for the Shanghai index by the end of this year.

China should limit “overly fast” growth of shadow banking, such as trust loans, as it may increase systemic risks to the banking and financial system if left unchecked, the Financial News said in a commentary on Dec. 24.

Cui, who has been bearish on China’s equities since May 2010, kept his forecast for the Shanghai Composite to fall as low as 1,923 at the end of this year. He said in an interview in February 2012 the gauge may drop to 2,100 by the end of the year. The measure rose 3.2 percent to 2,269.13 last year after a 15 percent rally in December. The index fell in 2010 and 2011. Bank of America was ranked first for Asia research in 2011 by Institutional Investor magazine.

To contact the reporter on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

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