Top News of the Week
More Tightening Underway as Housing Prices Rebounded in July
This is not the kind of data that Chinese policymakers are happy to see after four months of tough policies for the property market: average home prices of China's 36 largest cities rebounded 1.61% sequentially to CNY 8,680 per square metre in July, after being flat in June. And the data is from the National Development and Reform Commission, the country's top economic planner, so you'd better take it seriously.
To prevent a significant price recovery in the second half and control loan risks, China has launched further tightening measures in recent weeks, including the disclosure of 1,457 idle land parcels and the corresponding land hoarders, some of which are large and publicly-listed developers, so as to tighten the screws on bank lending to these firms. Banks were also required to do stress tests under scenarios of a 60% housing price drop in a select few cities that we believe include all tier-one cities such as Beijing, Shanghai, and Shenzhen. In our opinion, the purpose of the stress test is not to indicate that the 60% price drop is a very likely scenario, but to drive home the message that the government is troubled by bank exposure to the property sector and wants to rein in lending to developers.
For the sake of credibility, we believe the government will continue to pressure the developers until housing price appreciation shows meaningful signs of slowing, which has yet to happen. We learned that the municipal government of Beijing is now looking to limit developer access to pre-sales proceeds from unfinished properties, which will now go to an escrow account. As pre-sales proceeds usually account for about 40% of developers' capital, the new policy can be a major blow to developers' financing. This is actually not a new policy, but half-hearted implantation in the past has given developers considerable leeway. Given Beijing's influence as the capital and political centre, what Beijing is contemplating can have a strong signalling effect, and other local governments may follow suit soon.
Market Recap
Stocks moved up last week as large-scale infrastructure construction plans for southern China boosted investor confidence and confirmed that growth remains a top priority for policymakers. However, indices pulled back toward the end of the trading week on worries of a weakening global recovery and possible new tightening measures in the property sector.
Macro and Industry Updates
New Inflation-Fighting Measure: A Nationwide Vegetable Reserve
China's State Council last week announced a new vegetable reserve that can cover one week of consumption for consumers in the whole country, in an effort to curb speculation and smooth out price fluctuation. As harsh weather conditions and widespread floods affected southern China in recent months, food shortage has pushed up prices across the board. In July alone, vegetable prices increased 22.3% year over year, grain prices were up 11.8%, and poultry prices up 4.1%, pushing CPI to a 21-month high of 3.3%.
China has had strategic reserves for grains, sugar, cooking oil, and pork for decades, and is reportedly in talks with Japan, South Korea, Thailand, and Vietnam for a joint rice reserve; however, a vegetable reserve is rare, given the apparent challenge in storing and refreshing the inventory. As the latest economic data points to a slowing economy, the government is reluctant to raise interest rates and unleash new tightening policies to fight inflation. Setting up reserves to help stabilise prices seems like a second-best idea under the circumstances, although even if all the technicalities can be ironed out during implementation, we don't expect the effect of the new reserve to be felt in the market anytime soon.
McDonald's Issued CNY-Denominated Bonds in HK through Private Placement
The fast food giant has become the first multinational non-financial corporation to issue yuan bonds in Hong Kong. The bonds have an aggregate principal amount of CNY 200 million, carry an annual rate of 3%, and will mature in three years. In 2009, two banks from outside the Chinese mainland, Bank of East Asia and HSBC, were the first to issue yuan bonds in Hong Kong. Investors stashed an estimated CNY 100 billion in Hong Kong banks looking for investment opportunities, and we expect more of such bond issues to take place in the near future as multinationals tap the market to fund their booming operation in China. Wal-Mart, for instance, indicated in March that it may consider a yuan bond issue to fund expansion in the China market.
China Waives Business Taxes for Outsourcing Industry
From July 2010 to December 2013, ITO (IT Outsource), BPO (Business Process Outsource) and KPO (Knowledge Process Outsource) businesses in 21 cities, such as Beijing, Shanghai, and Dalian, will be exempted from a 5% business tax. This policy is aimed at helping China's fledgling outsourcing industry, which is under pressure from cost increases and a stronger currency. Currently, most outsourcing orders for Chinese firms come from Japan, where those firms enjoy considerable edge over their Indian counterparts, thanks to China’s rich supply of Japanese-speaking talents, the cultural similarity, and geographic vicinity. However, Chinese firms are in a weaker position in most other major markets, namely the US and Europe. Statistics show that Japan accounts for 15% of global IT outsourcing, compared to more than 70% by the US and Europe combined.
Iris Tan, Zhao Hu and Hua Ye contributed to this article
This is an edited version. The article originated from Morningstar.com.au.
