Chart of the week: the ups and down of Chinese property stocks

The sector fell about 6 per cent on the week, dragging the Shanghai equity market down by nearly 5 per cent in its biggest drop in nearly two years. But, as the charts after the break show, Chinese property companies have weathered the post-2007 global turmoil pretty well, outperforming the overall Chinese equity market.

The chart above shows last week’s sudden drop, in which property, construction and materials companies figured prominently. For example, Anhui Chaodong Cement dropped 17.7 per cent and Gemdale, a leading real estate developer, lost 12.7 per cent. (The Shanghai market was slightly up on Monday, at the time of writing, making little change to last week’s picture.)

But stand back and look at the property sector in the context of the rally that we have seen in emerging equity markets, including China, since last autumn:

The property sector, fuelled by hopes of economic growth and increasing stability in financial markets, has led the way for Chinese stocks. And if you take a longer view and go back to the pre-crisis months of early 2008, you can see that over the past five years, property stocks have done considerably better than the rest of the market:

Of course, property stock investors, are still nursing heavy losses compared to pre-crisis levels, but they’re smaller than the losses of shareholders in other companies.

What conclusions follow? First, equity investors don’t see any sign of the coming Chinese property crash so often predicted by China bears. The sceptics might retort that this is normal – there is no reason to expect equity investors to be ahead of other investors in spotting the disaster that is allegedly going to strike. But the sceptics have been saying this for five years and more, in some cases.

Next, equity investors clearly have considerable faith in the authorities’ capacity to keep the property market afloat even as Beijing tries to curb what they see as excessive price rises.

On this, the jury is out. Friday’s official figures, showed home prices rose in Beijing by 3.3 per cent compared to January 2012, much faster than December’s 1.6 per cent increase. Shanghai prices were up 1.3 per cent, after a flat December.

The National Bureau of Statistics (NBS) stopped publishing national price increases two years ago, but an index independently produced by Reuters from NBS data showed that prices rose by an average of 0.7 per cent in January compared to December, after a 0.4 per cent rise in December. Economists predict a 7 per cent national price increase in 2013, with another 5 per cent in 2014.

If they’re right there may not be a lot to worry about. But markets rarely move in such smoothly predictable ways. The Chinese leadership is about to change, with new men taking over from premier Wen and his government. The new team is widely expected to prefer steady change to radical upheaval in policymaking.

But they will face conflicting pressures. Rich Chinese with money in the markets, will want rising prices; but poorer people, desperate to climb the first rung of the housing ladder, will want the opposite.

What Next?

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