#Podcast — 14.11.2022

China Update on Covid and Property Measures

Prashant Bhayani, Chief Investment Officer, Asia

Covid Measures:

China announced additional measures including (1) lowering the quarantine period for close contacts will be shortened to “5+3” (5 days in hotel/quarantine facility and 3 days at home) from “7+3”. (2) The government also will not track contact of contacts and narrow the scope of high risk areas, (3) it will also no longer label medium risk areas. At the same time, China reiterated its “dynamic zero” policy and will take swift actions to shorten the size and length of Covid restrictions. Overall, the announcement signals a modest but important step could be signaling towards measured and gradual reopening. For example, it took four months for these changes to be enacted. Given the rising number of cases and the upcoming winter the next steps could come in the future after this period.

 

Property Policy Update:

In addition, at the weekend the PBOC and CBIRC announced 16 measures to support which includes commercial banks lending maturing loans to property developers of around 250bln RMB, aid in completing pre-sold homes, and encouraging financial institutions to facilitate M&A. While these aren’t new in scope, it should help to reduce tail risk in the property market as systemic risk could be reduced as policy banks are encouraged to offer special loans. In addition, “quality developers” with sound governance are eligible for loan extension from 6 to 12 months.

 

We have highlighted the two most important factors for China are Covid restrictions and the property market

Given how negative sentiment towards China equities and bonds were in the past few months with the first signs of a gradual reopening in Covid restrictions helped ignite a rally in the oversold China equities and the currency. The future pace of will likely be gradual and the pace will depend on the infection, rate of vaccine for the elderly, and the burden on the health-care system. Nevertheless, there now is a incremental reopening process underway and this is important.

 

The property market could benefit from this measures while left tail risk is being addressed more forcefully, at the same time, the authorities are encouraging loan extension from six to 12 months but to quality developers with sound governance. Thus, a blanket bail-out of leveraged developers of course remains unlikely as we expected. While this could lead to property bonds in the short-term, the few higher quality private property companies are the ones which will benefit from policy support. For sustainability of any rally, we need to see a bottom in the physical property market. While there can be volatility ahead but some comfort that these measures can help put a floor on China assets and that on its own is enough for the markets in the short-term. 

Covid Measures:

China announced additional measures including (1) lowering the quarantine period for close contacts will be shortened to “5+3” (5 days in hotel/quarantine facility and 3 days at home) from “7+3”. (2) The government also will not track contact of contacts and narrow the scope of high risk areas, (3) it will also no longer label medium risk areas. At the same time, China reiterated its “dynamic zero” policy and will take swift actions to shorten the size and length of Covid restrictions. Overall, the announcement signals a modest but important step could be signaling towards measured and gradual reopening. For example, it took four months for these changes to be enacted. Given the rising number of cases and the upcoming winter the next steps could come in the future after this period.

 

Property Policy Update:

In addition, at the weekend the PBOC and CBIRC announced 16 measures to support which includes commercial banks lending maturing loans to property developers of around 250bln RMB, aid in completing pre-sold homes, and encouraging financial institutions to facilitate M&A. While these aren’t new in scope, it should help to reduce tail risk in the property market as systemic risk could be reduced as policy banks are encouraged to offer special loans. In addition, “quality developers” with sound governance are eligible for loan extension from 6 to 12 months.

 

We have highlighted the two most important factors for China are Covid restrictions and the property market

Given how negative sentiment towards China equities and bonds were in the past few months with the first signs of a gradual reopening in Covid restrictions helped ignite a rally in the oversold China equities and the currency. The future pace of will likely be gradual and the pace will depend on the infection, rate of vaccine for the elderly, and the burden on the health-care system. Nevertheless, there now is a incremental reopening process underway and this is important.

 

The property market could benefit from this measures while left tail risk is being addressed more forcefully, at the same time, the authorities are encouraging loan extension from six to 12 months but to quality developers with sound governance. Thus, a blanket bail-out of leveraged developers of course remains unlikely as we expected. While this could lead to property bonds in the short-term, the few higher quality private property companies are the ones which will benefit from policy support. For sustainability of any rally, we need to see a bottom in the physical property market. While there can be volatility ahead but some comfort that these measures can help put a floor on China assets and that on its own is enough for the markets in the short-term. 

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