Chinese Property Props Up Plunging Hong Kong Stocks

Chinese real estate stocks offset losses for the broader market on Monday to trade higher in Hong Kong. That's after Beijing introduced a series of measures designed to stem a freefall in property prices.

Country Garden HK:2007, currently the largest developer in China by sales, was the top gainer for the Hang Seng Index, jumping 8.8%. Its subsidiary CG Services HK:6098 added 8.1%.

There were also strong showings from fellow top-10 developers Longfor Group (LGFRY) and HK:0960, China Overseas Land & Investment (CAOVY) and HK:0688, up 4.9%, and China Resources Land (CRBJY) and HK:1109, up 4.2%.

The Hang Seng, however, fell 0.8% on the day. That took Hong Kong stocks to their lowest low in 11 years. The Hang Seng closed at 17,079.51, its worst finish since October 2011 in the aftermath of the Global Financial Crisis. The Hang Seng has lost 26.6% so far this year.

The damage would have been worse, in other words, had not Beijing late last week introduced several measures designed to prop up the property market. It introduced a new capital-gains tax rebate for homebuyers, a 15-basis-point cut in first-home purchases through the Housing Provident Fund, as well as lowering the limits on mortgages for first-time buyers in cities where prices have fallen for three straight months.

The impact should be limited since the measures generally only apply to first-time buyers, while it is mainly smaller cities that have seen three consecutive months of price declines.

"In our view, these easing measures might be slightly positive, while policymakers remain far from a comprehensive solution to the severely beleaguered property sector," Nomura's analysts say in response. The Chinese Communist Party may await the end of its leadership reshuffle, due to complete in March 2023, before reassessing the progress of its efforts at real-estate reform, Nomura believes.

Country Garden is a mass-market homebuilder that sells into numerous Chinese cities, large and small, so its smaller-market sales stand to gain. Longfor, COLI and CR Land also have projects in dozens of Chinese cities.

Broadly, Asian markets closed lower on Monday, after a dispiriting day of trade on Wall Street to end last week. Thai shares were some of the worst performers, with the Stock Exchange of Thailand Index down 1.9%. Companies with U.S. dollar debt are concerned about the decline in the value of the Thai baht against the U.S. dollar. To address that, the Thai central bank chief said over the weekend that the Bank of Thailand would hike rates with an off-cycle meeting if necessary. It raised rates by 25 basis points last week.

Japan was an exception, with the broad Topix index rising 0.6% and the Dow-style Nikkei 225 up 1.1%. The Bank of Japan released the latest quarterly Tankan survey of business sentiment, which supported stocks.

While there was a dip in short-term confidence, Japanese companies appear reasonably confident about the mid-term outlook. That led to strong expectations for capital expenditure this fiscal year, with large companies upping their expectations to a 21.5% year-on-year capex increase, up from 18.6% the prior quarter.

Large Japanese companies also showed a greater willingness to pass along higher raw-materials costs to consumers of their finished goods. That coupled with the continued weak yen, which is again today trading above ¥145 to the U.S. dollar, suggests stronger margins.

China is suffering through a disastrous spiral of negative sentiment in the property industry. Fears about the financial health of major developers fed into a lack of confidence that homebuilders would be able to follow through on the construction of apartments sold off-plan. That in turn has led to a plunge in willing buyers. Some existing buyers who have put down deposits on new homes are now refusing to make mortgage payments on apartments they fear will never be finished.

The largest 100 developers reported sales for September that demonstrated a 16th straight month of decline, according to the China Real Estate Information Corp. New home sales plunged 35.1% in terms of volume, year on year, after a similar 36.6% drop in August. The slight improvement stems from a lower base this time last year.

Mainland Chinese markets are closed through Friday for the "Golden Week" holiday in honor of China's national day on October 1. But most major Chinese developers are listed in Hong Kong, where they can appeal to international investors and sell high-yield bonds.

Hong Kong markets are open all week bar Tuesday, when the city marks the Chung Yeung Festival, the "gravesweeping" holiday when families gather to tend the graves of their ancestors.

While property developers gained on Monday, there were losses for a wide range of Hong Kong mega-caps in other sectors. Financials such as Ping An Insurance (PNGAY) and HK:2318, down 4.3%, and China Life Insurance HK:2628 down 3.0%, saw some of the heaviest falls. The city's dominant bank, HSBC (HSBC) and HK:0005, saw its shares drift 2.2%.

China tech plays also fell, with e-commerce platform JD.com (JD) and HK:9618, down 2.6%, grocery-delivery app Meituan (MPNGY) and HK:3690, down 2.4% and mobile-phone maker Xiaomi (XIACY) and HK:1810, down 1.9%.

At the time of publication, Alex Frew McMillan had no position in the securities mentioned.