Investors Opt for State-Backed Developers Amidst Chinese Property Sector's Recovery

Government Support Draws Investors to State-Owned Firms in the Wake of Policy Changes

Investors are strategically positioning themselves in China's recovering property sector, showing a marked preference for the stocks and bonds of state-backed developers expected to benefit from increased government support. After a tumultuous period of regulatory measures to control speculation and reduce debt among developers, recent policy changes have signaled a shift in the landscape.

The property sector, a significant contributor to China's economy, has undergone a substantial transformation due to regulatory interventions aimed at curbing price speculation and reducing financial risk. Notably, several prominent property firms faced defaults on bonds and financial instability. However, the tide appears to be turning as the country's top decision-making body, the Politburo, hints at a shift in real estate policy. The People's Bank of China's commitment to offering reasonable financing to developers and lowering mortgage rates has provided additional impetus. Some cities, including Zhengzhou, have begun to relax property market restrictions.

For investors keen to re-enter a sector that constitutes a quarter of the economy, state-owned developers present an attractive proposition. These firms come with government endorsement and potential access to favorable funding options. This shift in investor sentiment is reflected in market indicators. Hong Kong's mainland developer price index has plummeted nearly 30% this year, while China's mixed domestic real estate benchmark has experienced a 13% decline.

State-owned developers, exemplified by companies like Yuexiu Property and China Resources Land, are trading at a price-to-earnings ratio of eight. This compares favorably to private developers such as Country Garden Holdings, which are trading at ratios below two. Some private developers' bonds, including those of Country Garden and CIFI Holdings, are rated below investment grade.

Jenny Zeng, Chief Investment Officer for Asia Fixed Income at Allianz Global Investors, explains that developers associated with state ownership, investment-grade ratings, or local financial institutions are better positioned to secure long-term, cost-effective financing. Meanwhile, short interest in the Asian real estate sector, particularly among private Chinese property firms, has been rising. Data from S&P Global Market Intelligence reveals an increase in shares loaned for short-selling, with Country Garden emerging as a prominent target.

Eastspring Investments' Fixed Income Lead Portfolio Manager, Wai Mei Leong, emphasizes a preference for high-quality property firms with governmental ownership or policy alignment. State-owned enterprises (SOEs) have gained market share due to lower debt and improved financing options. Despite historically accounting for around a third of property sales, SOEs now represent approximately 59% of sales, according to Capital Economics.

The first half of the year witnessed state-backed developers securing the top five positions in sales rankings, according to data from China Real Estate Information Corp. Notably, Country Garden, a long-standing leader in the industry, slipped to sixth place. The share prices of state-backed firms, such as Poly Developments, have outperformed the CSI 300 real estate index, while Country Garden's stock has experienced an 80% decline since mid-2021.

Yuexiu, backed by the Guangzhou local government, experienced a rebound in its five-year bond's value, while private firm CIFI's offshore five-year bond has seen a decline. Philip Meier, Head of Emerging Market Debt and Multi-Asset Portfolio Manager at Gramercy, highlights that performance concerns among non-SOE developers have triggered apprehension over potential defaults, causing market tremors.