China Recovery – Real Estate
Until April, China A shares saw sustained Northbound Inflows.
In January 2023, foreign investors invested a record $100 billion in China A shares. This was more than 2022, which was $90 billion.
We have started to see some outflows in May, but this is yet to be a trend.
Source: BNP
Sentiment:
Buying Capitulation
Northbound inflows into China A shares reached a record high of $34 billion in January 2023, up from $13 billion in 2022.
The MSCI China ETF also saw significant inflows of $2.737 billion over the past 52 weeks, bringing its total assets under management (AUM) to $8.075 billion. The ETF has yet to experience any outflows since November 6, 2022.
The short interest in the MSCI China ETF has declined significantly, reaching almost zero.
This suggests that investors are increasingly bullish on China A shares, and no change has occurred.
The Narrative:
According to Reuters, China has raised its growth target 2023 and may now aim for up to 6%.
The deluge of positive headlines ⬇
Most economists and investors were optimistic about a speedy recovery for China between October and March 2023. However, as of May, the market has realized that the recovery is not as strong as anticipated, and expectations have been revised lower and timing delayed.
Some analysts are now predicting a slower recovery for China in 2023. However, growth is hoped to catch up to original forecasts eventually.
Two banks have already reduced their 2023 GDP forecast, while three have lowered their CNY forecasts.
It suggests that the market is becoming more cautious about China's economic outlook, but the adjustment is reluctantly slow.
This note is the first of a three-part series on China's recovery. The initial part focuses on the overall financing trends and common charts with Consumer spending and recovery.
It then focuses on Real estate, financing and demand indicators from the sector.
The National Bureau of Statistics (NBS) adjusted several 2022 data points on May 17th by lowering numbers for the first four months of 2022. Consequently, the 2023 YTD data will now show higher year-over-year comparisons compared to the last data comparison.
Despite the revision, the real estate sector is still facing challenges. Sales of new homes have been declining since the start of the year, and prices have been falling in some cities.
I cannot explain how much the figures have been adjusted lower from my CIEC Data source. If you have access to better data, please share it with me.
I can see that 455 data series relating to Real Estate were published on 17th May 2023.
It affects Sales figures, floor space started, and the price realised.
These changes should flow into Local and central government finances, Industrial Production and GDP.
The National Bureau of Statistics explained on its website that the data for the reporting period cannot be directly compared with the published data for the same period in 2022 to calculate the growth rate.
Aggregate Financing
After the disappointing Purchasing Managers' Index (PMI) and Consumer Price Index (CPI) data, the below-expectation financing and loan data convinced analysts that they may have been too optimistic about China's economic recovery.
The manufacturing PMI came in at 49.2 in April, down from 51.9 in March.
The CPI came in at 0.10% YoY -0.10 MoM.
The financing and loan data also disappointed. The total amount of new loans issued in April was 1.2 trillion yuan, down from 1.4 trillion yuan in March. This is the lowest level since January 2022.
There is a declining demand for local funding in China, while foreign financing is becoming more challenging to secure.
Money Supply and Deposit Growth
The slower growth of M1 compared to M2 suggests that people are taking a more cautious approach to investments and spending.
The decline in deposit growth is likely due to the repayment of mortgage loans. People use their savings to pay off their mortgages, reducing the amount in circulation.
Overlap to the following note on Consumer Recovery!
The following three charts are relevant to both Real Estate and Consumers.
Household New Increased Loans
The following from the note China Household, Waiting for Revenge Spending 24th April 2023.
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“China's monthly household loans increased by over 65% YoY, while YTD increased by 35.71% YoY. There was a significant increase in medium to long-term loans, typically for mortgages.
The new short-term loans were at record levels, typically unsecured and used for short-term needs and filling liquidity gaps.
If deposits are increasing faster simultaneously, why would short-term loans also increase to record levels?”
“The record Deposits and short-term loans may have one explanation: households are repaying or refinancing their mortgage loans at a lower rate. New Short-term loans are to bridge maturity mismatches.
It means new long-term loans are double counted, the net figure could be meaningfully lower, and investors continue to be conservative by locking in higher deposit rates.”
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When a household requests repayment of their mortgage, it can take up to three months for the request to be processed, and repayment data will be published with a considerable lag.
The April data published in early May 2023 showed households had repaid 60.5 billion mortgage loans. An analyst, who was not named, estimated that households have initiated repaying RMB 700 billion worth of mortgages.
This suggests that the true extent of mortgage repayments has yet to be discovered.
In March 2023, Chinese households borrowed a record 609.4 billion yuan in short-term loans. However, in April, they repaid 125.5 billion yuan in short-term loans and 115 billion yuan in long-term loans. This suggests that households are becoming more cautious about borrowing money.
The decline in household savings is also concerning. In the first four months of 2023, household savings fell by 1.2 trillion yuan. This is the largest decline in household savings since 2015.
All points from points to the Mortgage repayment and more are in the pipeline.
Additional Data Points:
· The overall deposit growth rate fell to 12.44% in April 2023. This is the lowest level since 2015.
· The number of new home loans issued in April 2023 fell by 25% from the previous month.
· The number of homes sold in April 2023 fell 30% from the previous month.
New Increased Household Savings YTD
Unemployment
Twelve million fresh graduates will join the workforce in China this summer. Youth unemployment will likely continue to rise, and the current rate of 20.40% may not be the highest it will reach.
With high youth unemployment, companies may be more likely to replace older employees with cheaper new graduates. This could lead to a decline in demand for real estate, as young people are less likely to be able to afford to buy homes.
Consumer Confidence
The National Bureau of Statistics (NBS) Consumer Confidence Index (CCI) declined by 2 points in March to 88.80. The Income Outlook remained the same, while Employment increased by 1.8 points to 101.00.
The CCI measures consumer sentiment and is closely related to real estate spending. When consumer confidence is low, it can act as a persistent obstacle to real estate spending.
Real Estate
According to data disclosed by the National Bureau of Statistics in May 2022, in the first four months of 2022, the sales area of commercial housing was 397.68 million square meters, a year-on-year decrease of 20.9%; the sales of commercial housing were 3,778.9 billion yuan, a decrease of 29.5%, from Caixin quoting Huatai Securities research.
Building Sales
The floor space sold in China declined by 0.40% year-on-year (YoY) in March 2023, while building sales increased by 8.8% YoY. This was due to a rebasing effect, which means the comparison is being made against a lower base from a year ago.
A rebasing effect occurs when the base period is changed. In this case, the base period was changed from February 2022 to January 2022. This change in the base period led to higher YoY figures for both floor space sold and building sales.
Secondary Residential Sales MoM
People typically buy secondhand homes for personal use rather than as an investment.
The decline in cities with rising real estate prices from 57 to 36 is a worrying sign for those observing demand patterns. It suggests that the real estate market is cooling off. This could harm the Chinese recovery as real estate forms roughly 25-30% of the economy.
China Secondhand Listing Prices and Real Estate Climate Index
The prices of secondary homes listed for sale in China decreased by 3.85% year-over-year (YoY) for the week ending May 18, 2023. This is a worrying sign for the real estate market, which suggests that demand for second-hand homes is weakening.
The April Real Estate Climate Index (RCI) improved slightly from 94.72 to 94.78, which is still lower than a year ago. The RCI is a composite index that measures eight sub-indices, including new construction, sales, financing, and other factors that indicate price trends.
The RCI and secondary listing prices decline indicates that real estate demand is declining.
Floor Space started and Purchased.
The pace of new construction starts has slowed sharply in China. In the first quarter of 2023, new starts were down 20% year-on-year.
New land purchases are still primarily made by state-owned enterprises (SOEs). In the first quarter of 2023, SOEs accounted for 70% of new land purchases. As investors worry about credit and completion risk, SOEs are gaining market share from private developers.
Most companies are prioritising completing unfinished projects. This is due to government pressure and limited financing.
Real Estate Source of Funds
Domestic Loans -10% YoY
Self-Raised Find -19.4% YoY
The primary means of raising funds for real estate development in China are advance payments on new sales and mortgages. However, stringent regulations and the requirement to use escrow accounts for presale funds make these funds unsuitable for acquiring new land or completing projects.
This could lead to a decline in the number of completions.
The liquidity crunch in China is once again a significant issue and will likely drive defaults for the rest of the year.
Defaults and Fear of defaults are Rising.
14th May Guangzhou-based KWG Group Holdings Ltd., one of the few developers that obtained a state guarantee for its latest yuan note issue, said it had failed to make a $119 million redemption payment, thus triggering a cross-default of all its $4 billion bonds. Bloomberg.
According to estimates from HSBC China, High Yield bonds are likely to have a 22% default rate in 2023. The high-yield property dollar bond market will witness another $10.1 billion of defaults this year after a record $63.7 billion in 2022.
The value of bonds issued by Chinese real estate companies has declined significantly in the last month. High-yield bond issuers have seen the significant declines. For example, the value of bonds issued by Powerlong Real Estate has fallen from 30 to 10, and the value of bonds issued by Country Garden Holdings has fallen from 40 to 25.
Even investment-grade bonds have seen a considerable decline in value. For example, the value of bonds issued by Longfor Properties has fallen from 69 to 60, and the value of bonds issued by China Vanke has fallen from 90.50 to 86.25.
If defaults occur, they can have a number of negative consequences. They can cause delays in project completions, lower consumer confidence, and decrease demand for land auctions. This can contribute to a downward spiral in the real estate market.
The break from the decline between October and December of 2022 has ended, and the January Downtrend is accelerating.
China Real Estate Equity Peaked Before Economic Data and Bonds:
The ascending wedge pattern on the index has resolved with a break below support at 1960. The index is likely to find interim support at current levels of 1,780. However, I expect the decline to continue to at least 1,482. A test of the October low of 1,329 is a high probability.
Given the ascending wedge pattern, the runaway gap, and the support levels, it is not improbable that we will make new lows of 1,020, possibly in Q3.
CSI 300 Real Estate
After completing the rounding top and ascending wedge pattern resolution to the downside, the 4,960 is the first support, with more meaningful support at 4500.
There is a gap of around 4,400 from 2014, and the index will likely chase this and fill this gap during the decline.
Steel Product Prices
With Steel finished products Inventory near 12-month highs and bear flag break, further downside is expected.
The Hot and Cold rolled steel inventory is near record highs (following chart), with falling demand, it provides strong headwinds.
The break in the bear flag formation in both hot and cold steel prices may lead us to test the lows of 2020.
Steel Hot and Cold Rolled Steel Inventory
Most steel demand in China comes from government infrastructure spending, while real estate development demand is falling. The gap in demand from real estate is too big to be filled by infrastructure spending and is likely to push producers to export at lower prices.
In 2022, the government's infrastructure spending is expected to reach 1.4 trillion yuan ($204 billion), accounting for about 40% of total steel demand.
However, real estate development demand is falling. In 2022, real estate investment in China is expected to grow by only 2%, much lower than the average growth rate of 10% in recent years.
China Cement Prices
The cement price index is down to March 2018 levels, and the steel prices or back to November 2022. This is a worrying sign for the real estate market, as cement and Steel are two of the most critical materials used in construction.
Cement prices have fallen by 20.50% YoY, while steel prices have fallen by 21.50% YoY.
A decline in cement and steel prices indicates a negative outlook for new real estate developments and completions.
Anhui Conch Cement
The correction from October in China's largest cement producer share price has evolved into a bear flag pattern. Even if the bear flag thesis is wrong, we will likely test the 20.40 level again. If the bear flag thesis is correct, then a 1.618x extension of the rounding top is likely to be in play.
CSI 300 Index
The CSI 300 index is precariously close to the neckline of the 2019 head-and-shoulders (H&S) pattern and appears below the bear flag from October 2022. A break of 3,830 would confirm a break of the H&S pattern, but even if the H&S pattern is incorrect, the index is likely to test the October 2022 lows.
· A break below 3,830 could signal the start of a new downtrend for the CSI 300 index.
· A move below the October 2022 lows could signal the start of a more significant downtrend for the index.
Interest rates
China 2 Year
Yields bounced off the 2.20% trend support level. It is more likely that we will break below this level and test 2.11%.
China 3 year
The three-year yields are making lower lows, and the primary trend is lower. It is likely to test support 2.24% and could fall further to 2.11% and test the June 2020 downtrend.
China 10 year
The yields are now finding support at the quarterly pivot of 2.71%. Given the setup of the two- and three-year yields, it is more likely that we will break the uptrend from May 2020 at 2.63% and head towards 2.57%.
A break below 2.63% could signal the start of a new downtrend for yields.
A move below 2.57% could signal the start of a more significant downtrend for yields.
Takeaways:
I apologize for my previous message, which may have been too pessimistic (bear porn). I did not intend to be so bearish when I started writing, but the market data suggests that consensus economic forecasts are much too optimistic and lagging.
We continue to be in a period of disappointment between expectations and reality.
The equity market and key stocks have been selling off on each subsequent piece of good news. Insiders and well-informed investors have used every uptick to sell real estate, cement, Steel, and cyclical stocks.
A CNY fixing error to the weaker side would be the first indication that the PBOC will ease monetary policy and use the weaker currency to boost growth, which is currently being held back by the real estate sector.
The USDCNY will be driven not just by interest rate differentials but also by growth differentials.
The yield charts suggest that monetary policy easing is closer than we think. I believe that growth will pick up in the latter half of Q3.
The Yield charts suggest the Monetary Policy easing is closer than we think.
Growth should resume somewhere towards the end of Q3. The Chinese government has taken steps to stimulate the economy, and the destocking in the global economy could lead to a fresh demand uptick.
UPDATE 24th May 2023
Odds of a larger downside risk to China Stocks increasing!
CSI 300 gapped lower and closed at the low of the day.
I adjusted my chart analysis to what I posted on Monday's Substack Note. China Recovery - Real Estate.
CSI 300 Index
I now see a break of the bear flag, and break of the 2006 uptrend and potentially a massive H&S formation [currently in the works].
CSI 300 Real Estate falls 3.32%
Lowest Close since 1st December 2014. The nine-year rounding top is now in play.
Odds of a larger downside risk to China Stocks increasing!
CSI 300 gapped lower and closed at the low of the day.
I adjust my charts analysis to what I posted on Monday's Substack Note. China Recovery - Real Estate.
I now see a break of the bear flag, and break of the 2006 uptrend and potentially a massive H&S formation [currently in the works].
CSI 300 Real Estate falls 3.32%
Lowest Close since 1st December 2014. The nine-year rounding top is now in play.