Real estate stocks' woes belie growth

There is no doubt that China's economy has been slowing but the question is how much will GDP growth eventually fall below 6.

Andrew Wong

Monday, January 21, 2019

There is no doubt that China's economy has been slowing but the question is how much will GDP growth eventually fall below 6.5 per cent?

However, if even it keeps at the level of 6.5 per cent, another point worthy of discussion is whether the market will believe in this growth.

Nevertheless, the People's Bank of China also seems to be aware of the impact of increasing downward pressures on the economy, as it has already made a full percentage point cut in the reserve requirement ratio for banks in January.

At the same time, the market is confident that the PBoC will step up its monetary easing and even if it does not make a rate cut, it will make another big cut in the reserve requirement ratio.

But the question is whether monetary policy alone can solve all the problems.

Hong Kong's stock market last week witnessed a cumulative increase of more than 400 points, but after reports filtered through about firms failing to repay debts on time, some China real estate stocks plunged with one diving more than 80 cent and losing more than HK$20 billion in market value.

Although the company soon clarified that its financial position was strong and its shares rebounded, there are still a lot of problems plaguing investors, such as, why are there such rumors in the market and from which side does the selling pressure come from, pushing the share price of a company with a market value of HK$30 billion into a tailspin?

In fact, over the past year or so and as recently as last week, there have been a large number of listed companies that have seen their stock prices plunge.

One of the reasons appears to be that the market value of these Chinese real estate firms is huge and this has caught the market's attention.

On one hand, many shareholders who have money demands want to own mortgaged stocks to borrow money, while on the other, in the face of Hong Kong's regulators tightening margin limits and stricter requirements by banks for stock mortgage loans, a lot of major shareholders of listed companies will seek help of foreign hedge funds to obtain their loans.

The problem is that these hedge funds are not just from banks or securities companies. What to do with the mortgage shares is often the biggest risk for the borrowers.

Of course, the above factors do not represent the real reason for the sudden sharp decline in the price of Chinese real estate stocks, but it is certain that many listed companies whose major shareholders are mainland-funded are facing financial pressures, and they need to seek some non-traditional loan methods to solve their difficulties.

But the question is why are companies or their major shareholders under so much financial pressure in a country where GDP growth was still above 6.5 per cent last year, slowing but still among the highest in the world?

This is not a reasonable situation, and a topic worth discussing is if major shareholders receive funds through non-traditional channels, where will they go after receiving these funds?

We will talk about this next week.

Andrew Wong is an independent commentator.