Shanghai Securities News: Real Estate Control, Capital Repurchase Trigger Panic Slump: Insiders Point Out Exaggerated Reading Of Relevant Information

On March 4, the A-Share market encountered a panic slump as SSE Composite Index dropped by nearly 100 points and closed at 2,273.40 points, a decrease of 3.65%. SZSE Component Index, with a lot of real estate stocks, was even stricken by a more dramatic drop of 5.29%. In response to the sudden drop of the large-cap stocks, the Shanghai Securities News interviewed several securities experts. Generally, they hold that the sudden discharge of the drop pressure in the A-Share market resulted from the market’s exaggerated comprehension of such information as the promulgation of the “Five New State Measures on Cementing the Real Estate Control” (the “Five New State Measures” for short) and the RMB910 billion net repurchase of China's central bank last week. However, the market over-reacted to the negatives after analyzing substantial effects of relevant policies.

The release of the “Five New State Measures” has limited influence in a short term, while it will benefit the real estate market in the long run.

An expert holds that the release of the Detailed Rules for implementation of the “Five New State Measures” by the Ministry of Housing and Urban-Rural Development of the PRC indicated the government’s attitude of supporting owner-occupation needs, curbing house purchase for speculative investment, and cracking down on soaring house prices. Yesterday, the sector of real estate stocks witnessed a slump of 8.38%, while dozens of kinds of real estate stocks on the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE), including China Merchants Property Development Co., Ltd., Poly Real Estate Group Co., Ltd., China Vanke Co., Ltd., and Gemdale Corporation, reached the daily minimum trading limit, which led to a dramatic drop in the sectors of upstream industries such as the cement industry and the building material industry. Market insiders hold that the control measure released last week directly resulted in the depression of the industrial chain of real estate.

Specifically, the control measure focused on levying the income tax accruing from second-hand house trading according to 20% of price spreads, which would curb second-hand house trading in a short period. However, it exerts little influence on real estate developers and the upstream industries, nor will it considerably affect the investment growth.

Vice President Li Xunlei of Haitong Securities says that the “Five New State Measures” aims to increase the costs of second-hand house trading, so as to curb the speculation in the real estate market. With the control measure implemented gradually, the real estate market will tend to be rational, while active funds will leave the market for new investment channels.

“In light of overseas mature markets, residents generally invest their assets in funds, stocks, bonds, and other products in the financial market. Predictably, domestic investors might transfer more funds from the real estate market to the financial market, which will be a piece of positive news for the stock market. Forthcoming promulgation of control measures on the real estate industry will speed up the rational allocation of residents’ assets,” said Li.

Besides, Li says that one of the major reasons for the panic in the market is the unclear anticipation. The panic in the market for the real estate control will be alleviated after local governments issue detailed rules for the real estate control and major policies such as those for levying housing property tax are fixed.

“The new real estate control aims to stabilize the market, so we need not to immerse ourselves into panic at all,” added Li Daxiao, a famous professional in the finance industry. The real estate control targets at the speculative second-hand house market, while it has limited effects on new house trading characterized by inelastic housing needs and even fuels new house trading. The listed companies in the real estate industry will benefit from the real estate control in the long run, as someone even regards the policy as a gift packet sent by the government to real estate developers.

Zhang Yidong, Chief Strategy Analyst of Industrial Securities, holds that first, economic recovery still dominates over the current market situation. The new real estate control, which exceeded the market anticipation, has led to worries about the market recovery. On Monday, the panic underselling behaviors occurred in the industrial chain of real estate, after which the stock market experienced a big plunge. However, economic recovery will remain unchanged in the first half of 2013, as the new real estate control is different from the “Ten State Measures on Cementing the Real Estate Control” promulgated in 2010. House prices are not increasing on the whole, and the new policy attaches importance to controlling the future market, specifying the policy of limiting house purchase, and working out different detailed rules for all the regions, and puts emphasis on the second-hand house market. In the next 2 or 3 months, the investment in the real estate will not be decreased remarkably. Second, the new government will boost the urbanization and give away dividends of reforms. Afterwards, it is expected to accelerate the industrial investment benefiting from the infrastructure investment and the economic restructuring, while financial innovation, especially assets securitization, will drive the capital market and the economic growth, which will form a win-win situation. Third, due to the bottom-out of inventory cycle time and the pass of the peak of capacity expansion, listed companies will increase business incomes and gross margin rates this year, with their profits expected to be increased by 16%. Fourth, the blue chips represented by bank-related stocks have higher appeals for investment after adjustment. All in all, in the first half of 2013, the investment in the real estate industry will not be dramatically decreased, with the economy to be recovered slightly. Great inflationary pressure will not occur, while capital prices will face little pressure in increase. The mid-term market situation will not end probably. So, we should positively seek for opportunities at the bottom instead of being in panic.

The repurchase of China’s central bank does not mean a tense policy.

The RMB910 billion net repurchase of China’s central bank last week triggered worries about liquidity shrinking. On February 21, the central bank repurchased RMB20 billion in total by way of tendering of interest rate. In the last week before the Spring Festival, the central bank successively conducted reverse repurchases of RMB450 billion and RMB410 billion, which were due in the week of February 22. Thus, the repurchase of RMB860 billion was completed. On February 19, the central bank repurchased RMB30 billion after 8 months. Plus its repurchase of RMB20 billion on February 21, the net repurchase in the week of February 22 reached a record high of RMB910 billion. Liu Shengjun, Executive Vice President of CEIBS Lujiazui International Finance Research Center, says that the central bank’s move, a response to inflationary pressure in advance, aims to offset the soaring credit loans in January, which will not lead to tense liquidity in the market.

“The increase of domestic credit loans in January doubled that in the same period of last year, so the central bank’s timely response to excessive loan increase could be taken as a piece of positive news. If the central bank makes adjustment when inflation data are released, that will be late,” said Liu Shengjun.

Li Huiyong, Chief Macro-economy Analyst of SWS, says that the worries about the repurchase of RMB910 billion in the market are resulted from the exaggerated comprehension. First, one policy will not influence the slight recovery of the macro-economy. Second, “delivering before the Spring Festival and repurchasing after that” is the central bank’s routine conduct. The central bank’s repurchase again was only the normal liquidity management after the festival, not the launch of tense policy. Rationally, the central bank released a stable currency policy, instead of a tense one. Third, this adjustment in the market will facilitate the long-term sound development and rational investment.