May 13 (Bloomberg) — Chinese equities slumped into the second bear market in nine months this week. Pan Weiting says there’s no better place to put her money than in stocks.
Pan shelved plans to buy an apartment after real estate prices jumped the most on record and the government banned loans for third homes to cool the economy. Interest on the 400,000 yuan ($59,000) she has in her bank account is being eaten away by rising inflation, and the country’s regulations limit her investment choices to property or domestic equities.
“The stock market is the best choice for the moment,” said Pan, a 27-year-old Shanghai accountant. “Even the bank staff advised me against depositing more money.”
Government leaders sought to deflate a speculative bubble that Knight Frank LLP said sent property prices up 25 percent in the fourth quarter by curbing mortgage loans, leaving people in the nation with the world’s biggest savings few places to put their money. JPMorgan Chase & Co. expects China stocks to rally more than 40 percent in a year, while Robeco Group and Macquarie Group Ltd. forecast a second-half rebound.
“It becomes a question of who’s the least ugly girl at the fair,” said Victoria Mio, a Hong Kong-based senior fund manager at Robeco, whose firm oversees $194 billion worldwide. “There is some migration occurring and the shift will accelerate with a few months of negative interest rates.”
Falling Home Prices
Citigroup Inc. of New York and Paris-based BNP Paribas predict a 20 percent drop in home prices in 2010, after Chinese policy makers increased bank reserve requirements three times in the past three months to slow lending.
As much as $59 billion, about a third of housing transaction volumes in the 35 biggest cities in 2009, may be diverted from property to equities this year, according to Citic Securities Co., China’s biggest listed brokerage.
Saving money has been a cultural touchstone for the Chinese since the government dismantled the so-called iron rice bowl of lifelong job security following economic reforms in the 1990s. The measures “significantly increased the incentive for precautionary savings,” People’s Bank of China Governor Zhou Xiaochuan said in a February 2009 report.
The nation’s savings ratio stood at 54 percent of gross domestic product in 2008, the highest among major economies in the world, according to data compiled by the World Bank. Only Libya, Kuwait and Azerbaijan rank higher.
China’s $7.2 trillion of corporate and household savings is being eroded as inflation rises. Consumer prices climbed 2.8 percent in April, surpassing the one-year savings rate of 2.25 percent.
China’s real-estate prices surged by a record 12.8 percent in April and the economy expanded 11.9 percent in the first quarter of 2010, the most in almost three years, after a 4 trillion yuan stimulus package and unprecedented new loans of 9.59 trillion yuan helped revive growth last year.
The nation’s inflation rate is forecast to climb 3.4 percent this year, according to the median estimate of 18 economists surveyed by Bloomberg on May 11.
The Shanghai Composite Index fell to as low as 2,647.57 this week from as high as 3,338.66 on Nov. 23, a more than 20 percent drop that’s the common definition of entering a bear market. The measure rallied 2.1 percent today to 2,710.51, the most since March 29.
“Chinese stocks would be their first choice of investment because they may remain cautious about the property market in the short term,” said Shi Lei, a Beijing-based analyst at Bank of China Ltd., the biggest foreign currency trader. “The fixed deposit would be their last choice.”
Chinese stocks are restricted to a limited number of foreign funds, with most overseas investors buying the shares through exchanges such as Hong Kong.
BlackRock Inc. based in New York is selling Chinese stocks on expectations that economic growth has peaked, while State Street Global Advisors of Boston has an “underweight” as the shares are pricier than smaller developing nations. New York University Professor Nouriel Roubini, who forecast the U.S. recession more than a year before it began, said May 12 that China’s overheating economy risks a slowdown. The Shanghai gauge trades at 15.6 times estimated earnings, compared with the multiple of 12 for the MSCI Emerging Markets Index.
Logistics company owner Hu Jielin says Chinese equities are still the best investment choice. He spent 9 million yuan buying apartments in Shanghai, where average home prices have risen threefold in the past five years, according to data from Shanghai Uwin Real Estate Information Services Co. and eHomeday.com.
Hu, 33, said he won’t buy more property given the government’s curbs. Instead, he plans to double his stock investments in the next six months to 3 million yuan ($439,284).
“Property prices are probably going to take a breather with the current tightening,” said Hu. “Currently stocks look the best bet.”
For Pan Weiting, equities also trump homeownership for now. She doesn’t plan to resume her search for an apartment in Shanghai’s eastern Pudong district until prices decline by 20 percent.
“It’s always good to own the roof over your head,” she said. “But you’ve got to be able to afford it. For now, it’s out of my reach.”
–Chua Kong Ho and Zhang Shidong in Shanghai. With assistance from Kevin Hamlin in Beijing, Judy Chen in Shanghai and Richard Frost in Hong Kong. Editors: Allen Wan, Alan Mirabella.
To contact the Bloomberg News staff on this story: Chua Kong Ho in Shanghai at firstname.lastname@example.org; Zhang Shidong in Shanghai at Szhang5@bloomberg.net