One-on-One interview
Chinese Equities
Implications of property easing and relaxation of
investment rules
Mandy Chan
Head of China and HK Equities
March 2015
"The reduction in down-payment for second home mortgages, changes to property transaction tax should help
stimulate home sales, support the second-hand property market, and facilitate upgrading demand."
- Mandy Chan, Head of China and HK Equities
The government announced property easing measures.
What are the potential implications?
•
The government announced a cut to both China's mortgage
down payment requirement and property transaction tax
policy on 30 March 2015.
•
Specifically, the down payment requirement for all second
mortgages has been lowered from 60-70% to 40%. The
magnitude of this round of policy easing is better than market
expectation, as the market was only expecting a reduction of
50%.
•
For mortgages taken out against the housing provident fund,
the down payment requirement for buyers borrowing for their
first mortgage has been lowered from 30% to 20%.
•
Meanwhile, the property transaction tax on homes owned
over 2 years will also be waived (lowered from the previous 5
years).
•
These, in combination with the two recent policy rate cuts,
should help stimulate home sales, support the second-hand
property market, and facilitate upgrading demand.
Following the rally in the A-share market in Q4 2014, the
offshore H-share market is trading at a significant discount to
its domestic counterparts, as shown by the Hang Seng China
AH Premium Index below. The arbitrage opportunities could
not be fully exploited even with the launch of Stock Connect.
For mainland retail investors to be qualified to invest in Hong
Kong shares through Stock Connect Southbound trading,
they were required to have a minimum account balance of
RMB500,000. Based on China securities clearing house's
latest data, by the end of Oct 2014, around 6% of total
accounts met the qualification. As of March 20, 2015, total A
share accounts was 147 million.
For onshore institutional investors, their appetite in H-share
market through South Bound trade of Stock Connect was
very limited due to the QDII status requirement. Hence, the
relaxation in trading rules should create attractive
opportunities for onshore institutional investors to diversify
their portfolios.
Meanwhile, CSRC has relaxed the rules for domestic mutual
funds to invest in Hong Kong equities. What is the
significance of this move?
The China Securities Regulatory Commission (CSRC)
announced on 27 March 2015, that newly established domestic
mutual funds in mainland China will be allowed to invest in Hong
Kong stock market through Shanghai-Hong Kong Stock Connect
without Qualified Domestic Institutional Investor (QDII) quota.
Existing funds can do the same on condition that this is not
inconsistent with their mandate and their clients are informed.
No CSRC approval is necessary.
The announcement could be a catalyst for the H-share market
as valuations are attractive and the recent regulation could
increase investor appetite.
Source: Bloomberg, data as at 30 March 2015. For
illustrative purposes only. Levels above 100 indicate that
dual-listed A-shares are trading at a premium to H-share
counterparts.
How has the market reacted to this news?
•
The Hang Seng China Enterprises Index (HSCEI) rose 3.4%
after the announcement, while the Hang Seng Index gained
1.5%. Net buy orders from Shanghai to Hong Kong via Stock
Connect reached a new high of RMB2.56 billion.
•
Meanwhile, onshore equities, as measured by CSI 300
Index, rose 2.9% after the central bank governor said the
government can do more to support growth in China.
•
The Shanghai property index had jumped 7.3% before the
People’s Bank of China (PBoC) cut the down-payment
requirement for some second homes.
What is the impact of these developments on the HGIF
Chinese Equity Fund?
•
We remain positive on Chinese equities in general, over the
medium to long term.
•
HSCEI is now trading at a forward Price-to-Earnings (PE) of
8.6x (vs. 14.8x of CSI 300). The portfolio is overweight on
industrials, and continues to favour H-shares that are trading
at deep discount to their A-share counterparts, especially
airlines and construction firms.
•
The small-mid-cap space in Hong Kong will benefit given
their attractive valuations, of around 10x to 50x PE. In
comparison, the companies listed in ChiNext, the Shenzhen
version of NASDAQ, are trading at 50x to 150x PE ratio.
•
The portfolio continues to be positive on property companies
focusing on tier 1 cities given we see potential for undersupply later in the year, while valuations remain at attractive
levels. Given that the recently announced easing measures
were even higher than the market's expectation, this should
be positive for the portfolio.
Source: HSBC Global Asset Management, data as at 30
March 2015. Data shown is for illustrative purposes only and
does not constitute any investment recommendation.
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