The worst is yet to come for the Chinese Real Estate Market

Chinese Real Estate Struggling - 2023

According to an informal survey conducted by Bloomberg News among analysts and money managers based in Hong Kong and mainland China, the property sector in China is still facing challenges that have affected the nation’s economy. The crisis has resulted in a significant outflow of global funds from the second-largest stock market in the world. Out of the 15 respondents, nine of them believe that the worst is yet to come. Six of the respondents identified the housing woes as the most significant risk for equities in the final quarter of 2023, while geopolitical tensions emerged as the second-biggest concern.

The current results reflect a worsening trend in China’s real estate industry. Policymakers seem hesitant to implement more aggressive stimulus measures, as they fear it may result in long-term financial risks. This week, the market sentiment has further deteriorated due to concerns about liquidity and weak housing demand. As a result, Bloomberg Intelligence’s property stocks gauge has dropped to its lowest level in 12 years.

Pessimism over the property sector aside, the informal survey showed investors have otherwise turned optimistic on the overall market given a series of recent policy support measures and inexpensive valuations. Roughly around 70% of the respondents said they plan to add stock positions both onshore and in Hong Kong.

According to Kenny Wen, head of investment strategy at KGI Asia Ltd., who participated in an informal poll, we are currently facing the worst of this cycle and still have a long way to go before the property crisis is resolved. As a result, it’s unlikely that the stock market sentiment will recover significantly until the property crisis is adequately addressed.

Investors are facing added uncertainty as China Evergrande Group, a real estate conglomerate struggling with debt, revealed that its billionaire chairman is suspected of committing crimes. Meanwhile, Country Garden Holdings Co., formerly China’s largest developer, is battling to avoid a public bond default. This has contributed to the CSI 300 Index, a benchmark for Chinese equities, being down 4.7% in 2023 so far, which is on track for a third straight year of losses. As a result, equities are viewed as the best investment option by more than half of respondents in an informal survey, with nine out of 15 polled ruling out the need for state-backed funds to support the market in Q4.

The informal poll’s median forecast shows the CSI 300 ending the year at 4,100, potentially gaining about 11% from the latest close. The Hang Seng Index is predicted to hit 20,500, indicating an upside of around 15%. However, overseas investors have sold about 37 billion yuan ($5.1 billion) of mainland China stocks on a net basis in September via trading links with Hong Kong. After a record 90 billion yuan selloff last month, positioning reached the lowest point since October 2022 when the nation’s reopening from stringent Covid curbs sparked a sharp rebound over the next three months.

Despite this, the continued selling by foreign funds has led to speculation that the worst of outflows may be over. Fewer than one-third of those surveyed expected fund flows via the so-called Stock Connect program to turn negative on a net basis for the year. “Yuan assets, especially A shares, are currently very cheap and many pockets of the market are oversold,” said Zhu Houzhong, a fund manager at Shanghai Youpu Investment Co. who participated in the informal poll. Meanwhile, the onshore yuan fell to its weakest level against the dollar since December 2007 earlier this month.

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