The View

Why betting on recovery in Chinese property stocks requires a leap of faith

Sentiment towards the property sector has improved in recent months in expectation of a rebound driven by more accommodative policy

Even so, questions over the efficacy of new policies, poor transparency and hidden debts are dampening the effects of any shift in sentiment

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Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm.

Published: 9:45am, 8 Feb 2022

Over the past several months, a growing number of prominent Wall Street firms have turned bullish on China’s beaten-down stocks. They sense a turning point in a market that has suffered simultaneous shocks, resulting in attractive valuations and the prospect of more forceful measures to shore up growth.

More tellingly, sentiment towards the property sector – the largest driver of China’s economy and the acid test of the government’s efforts to reduce corporate indebtedness and social inequality – is no longer as bleak as it was towards the end of last year.

An exchange-traded fund that tracks the performance of Asian high-yield bonds, nearly 30 per cent of which are issued by Chinese real estate developers, has stopped falling precipitously and has been volatile since last October, even rising more than 4 per cent since January 17.

Markets, which are forward-looking and move on what investors expect to happen in six to 12 months’ time, have entered a phase of intense speculation over the scope for a policy-induced rebound in property assets.

There are good reasons to want to correctly anticipate a recovery in China’s real estate sector. Successfully calling the bottom of the market could prove to be one of the most lucrative trades this year.

A sustained rally in property assets would help restore confidence in an industry that continues to pose a severe threat to China’s markets and economy. It would also create a rare opportunity for investors to capitalise on policy support at a time when central banks the world over are starting to withdraw stimulus.