Are Chinese properties ‘too big to fail’?

Added 12th May 2016

The property sector accounts for a significant portion of GDP and the government continues to prop it up, analysts said.

Are Chinese properties ‘too big to fail’?

Despite warnings from analysts who say the China property sector bubble looks similar to the US subprime crisis that sparked the 2008 financial crisis, some remain warm to the sector.

The Chinese property sector outlook is expected to remain positive, as the general undersupply situation in the tier-one and tier-two cities, coupled by a low interest rate environment, are expected to help maintain house prices at a stable level, analysts said.

David Tan, CIO of Asia-Pacific fixed income at Allianz Global Investors, told FSA that he remains overweight Chinese properties.

"If you look at the tier-one cities, prices have started to stabilise and even turn up. This year, we are still overweight. We believe it will continue to climb. Although yields have gone down for now, we think from a relative value perspective, there is still some value in Chinese properties.

“The Chinese property sector is policy driven," he added. "It contributes 17%-18% of the country’s GDP. When including anything supporting the property industry, such as transportation, it will be 20%-25%.

"That’s actually quite a significant part of the Chinese GDP and [therefore] it is too big to fail.” 

Property market support

Initiatives to support housing demand and resolve inventory overhang are underway.

For example, the government will push forward urbanisation, providing better employment and social-welfare access and fiscal subsidies in small cities to assist migrant workers in home purchases and settlement, HSBC said in a research report.

The government estimated that migrant workers now account for 30%-50% of home purchases in many tier-three and tier-four cities.

“We are positive on Chinese property from both an equities and fixed income standpoint. The generally dovish policy stance will continue to be supportive of the market. Mortgage rates have declined to a historical low amid PBOC’s rate cuts; this, along with resilient household disposable income, lower down payment ratio (for first and second home mortgages) and lower property transaction costs have contributed to improving household affordability,” the report said.

From an equities standpoint, HSBC said it finds attractive opportunities in companies that are focusing on tier-one and a number of selective tier-two cities, given the potential of a better supply and demand situation this year.

Chinese property continues to be one of HSBC's largest active sector positions in its Asian fixed income portfolios, it added.


The five top-performing Asian property funds have been faring worse than the FTSE 350 Real Estate Gross GTR over the past three years, according to FE Analytics.


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