Buy Chinese developers? Mortgage boycott suggests stock rebound is built on fragile confidence

An index tracking 112 mainland property stocks has surrendered all of this year’s gains, after rising as much as 25 per cent between January and early April

The latest mortgage boycott has added a new challenge for policymakers trying to steady the economy hit by China’s zero-Covid strategy

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A man walks in front of a housing complex by China Evergrande in Beijing in October 2021. Photo: AFP

Published: 7:30am, 25 Jul 2022

Investors who profited from bets on rock-bottom property stocks have realised the new-found optimism in the industry is simply too fragile. A mortgage boycott against stalled projects has swiftly wiped out all of this year’s winnings.

An index tracking 112 listed mainland developers including China Vanke, Poly Developments and China Merchants Shekou Industrial Zone has surrendered all of the gain this year, after rising as much as 25 per cent between January and early April, according to data provider Shanghai DZH.

In Hong Kong, the Hang Seng Mainland Property Index has declined 12 per cent over the past four weeks, when homebuyers in more than 90 cities threatened to stop servicing their loans in protest. Huang Hai, a star manager at Wanjia Asset Management, slashed his holding of property stocks last quarter, while some brokers turned bearish on the sector outlook.

The crisis reflects “challenging liquidity conditions for private developers and weak consumer confidence,” said Iris Tan, an analyst at Morningstar in Shenzhen. “We expect the event might further dampen homebuyer sentiment, and [delay] property sales recovery in the near term.”

The event underlines the industry frailty, widening cracks since Beijing unleashed its “three red lines” policy in August 2020 to rein in excessive debt among the nation’s weakest developers. The policy has spawned a credit squeeze, unprecedented bond defaults and a slump in home sales in the US$60 trillion domestic housing market.