China/Hong Kong Weekly Market Pulse: Property sector regulatory easings and stronger PMIs

Key Highlights from the Article

• Chinese authorities introduced measures aimed at revitalizing the property market, including reduced down payments and mortgage rates. These policy changes, along with others, are likely to influence investor confidence and potentially sustain a more meaningful rally in both Hong Kong and mainland Chinese stocks this week.
• China's manufacturing PMI data for August showed signs of improvement, with manufacturing PMI reaching 49.7 and Caixin China Manufacturing PMI rising to 51. These indicators may influence market sentiment and economic expectations for the week.
• Northbound flows witnessed net sales of RMB15.7 billion, marking the largest monthly outflow since 2014. Nonetheless, the Nasdaq Golden Dragon China Index recorded an impressive 8.6% surge that could offer insights into market sentiment this week.
• Policy signals, coupled with undemanding PE and reasonable growth projections can provide support to the market.

Anticipating a Dynamic Week: Market Outlook Following Modest Gains Amidst Positive News

The Hang Seng Index saw a modest 2.4% rally during a shortened 4-day week due to a typhoon. Simultaneously, the Hang Seng China Enterprise Index recorded a 1% increase, while the Hang Seng Tech Index gained 3%. Regarding sector performance, the energy, materials, and consumer discretionary sectors outperformed, while healthcare, information technology, and industrial sectors lagged behind. Notably, Southbound mainland investors purchased HKD8.6 billion worth of shares listed on the Hong Kong bourse.

Meanwhile, in the A-share market, which had a full 5-day trading week, the CSI300 experienced a 2.2% rally. This rally was subdued despite several policy initiatives aimed at boosting the equity and property markets throughout the week. Northbound flows continued to witness overseas investors selling into the rally, resulting in a net sale of RMB15.7 billion for the week. For August, northbound flows registered a net sale of RMB90.7 billion (equivalent to USD12.7 billion), marking the largest monthly outflow since the inception of Stock Connect in 2014. It's worth noting that a substantial portion of this selling pressure reportedly came from the liquidation of long-only mutual funds.

Despite the relatively lackluster performance of A-share markets and the significant outflows, the situation for Chinese ADRs listed in the US is quite different. The Nasdaq Golden Dragon China Index surged impressively by 8.6% last week. Notably, PDD Holdings (PDD:xnas), the parent company of China's e-commerce giant Pinduoduo, soared by 29.3% for the week following its report of a 66% YoY increase in revenue and a 39% growth in adjusted EPS. KE Holdings (BEKE:xnas) also experienced a substantial jump of 29.2% for the week, driven by China's regulatory easing on property transactions.

It will be intriguing to observe how investors respond to the recent wave of positive news since last Friday when Hong Kong was closed due to the typhoon, and throughout the weekend. Notable policy changes include a reduction in the minimum down payment, relaxed eligibility criteria for first-home buyers in Tier-1 cities, a lower mortgage rate floor for second-home buyers, and reduced interest charges on outstanding mortgages. While none of these regulatory easings alone can be considered a game-changer, the signaling effect of these policy initiatives is significant. They are likely to boost investor confidence and potentially sustain a more meaningful rally in both Hong Kong and mainland Chinese stocks throughout this week.

In terms of valuation metrics, the Hang Seng Index appears notably inexpensive with a modest PE ratio of around 9x for 2023 and an even more favorable 8.4x for 2024 based on consensus earnings forecasts. The EPS growth for Hang Seng is projected to be at 7.3% in 2023 and 12.0% in 2024. CSI300 Index, while showing stronger earnings growth with an around 16% projection for both 2023 and 2024, carries a comparatively higher but still modest PE ratio of 12.3x in 2023 and 10.6x in 2024. The valuation is undemanding and could provide some support to the market, coupled with supportive signals and improved earnings prospects.

Recap of Key Events Last Week

Stock market support policies

Chinese authorities have implemented a series of substantial measures to bolster the equity market. These include a reduction in stamp duty on securities transactions, decreasing from 1‰ to 0.5% starting on August 28. Additionally, the China Securities Regulatory Commission (CSRC) has unveiled stricter controls on Initial Public Offerings (IPOs) and new share placements by listed companies, aimed at curbing the influx of new shares. Controlling shareholders are now subject to restrictions on divesting their stakes, particularly for companies with share prices below issuance price, net asset value, or insufficient cash dividends in recent years. Furthermore, after the market closes on September 8, the minimum margin financing requirement ratio for securities transactions will decrease from 100% to 80%. These measures underscore China's commitment to revitalizing investor confidence and ensuring market stability, with particular attention to regulating share supply. Notably, while the reduction in stamp duty garners attention, it's important to highlight that the restrictions on share issuance could potentially wield a more significant impact by directly limiting the supply of stocks.

PBoC lowers down payment ratios and mortgage interest rates for second homes and outstanding mortgages

China's property sector has undergone significant policy changes aimed at addressing its challenges. On August 31, the People's Bank of China (PBoC) and the National Administration of Financial Regulation (NAFR) introduced three measures:

1. Lowering Down Payment Requirements: The down payment requirements for first and second-home buyers have been standardized at 20% and 30%, respectively, across all cities, including Tier-1 and Tier-2 cities that have home purchase restrictions.  Before these changes, buyers in Tier-1 and Tier-2 cities faced higher down payment hurdles. For first and second homes without outstanding mortgages, the minimum down payment was 30%. For second homes with outstanding mortgages, it was even higher at 40%. Tier-1 cities like Beijing and Shanghai required a minimum of 35% down payment for first-home purchases, and 60% and 50% for second-homes regardless with or without outstanding mortgages, respectively. In Shenzhen, the policy was even more stringent, with a 70% down payment required for second-home purchases. This move to standardize down payments is expected to stimulate housing demand in Tier-1 and Tier-2 cities with home purchase restrictions. However, it may come at the expense of lower-tier cities, which could lose their competitiveness in the housing market.

    

2. Cutting the mortgage rate floor for second-home buyers: The PBOC lowered the mortgage rate floor for second-home purchases by 40bps. Specifically, this revision entails a shift from a 60bp premium above the 5-year Loan Prime Rate (LPR) to a more favorable 20bp premium over the same benchmark. The minimum mortgage rate remains at LPR minus 20bps. Currently, second-home mortgages charge around 4.8% while first-home mortgages charge 3.9% on average. The change will narrow the gap between the two.

    

3. Reducing Interest Rates on Outstanding Mortgages: Starting September 25, 2023, homeowners with outstanding mortgages can refinance, negotiating the new interest rate with their bank. However, it cannot fall below the local minimum set by authorities. This benefits borrowers, promotes consumption, and limits inappropriate use of loans.

Tier-1 Cities relax eligibility of the first-home definition

Last week, Guangzhou, Shenzhen, Shanghai, and Beijing relaxed the criteria for homebuyers to be considered as first-home buyers when applying for a mortgage loan. This policy shift, known as "认房不认贷" (literally translated as "Recognize the House, Not the Loan"), requires banks to apply the more favorable mortgage interest rate associated with first-home buyers to mortgage applicants, regardless of whether any members of the household have previously utilized loans for property purchases if none of its members own a residential property under their name in the city in which they are applying for a mortgage. This move will increase the demand for housing in Guangzhou, Shenzhen, Shanghai, and Beijing and support the property prices there. However, it may also diverge housing demand from lower-tier cities that have the most excess housing inventories and are losing population to higher-tier cities as their young residents leave for better job opportunities in the latter.

Major banks cut deposit rates

Chinese banks last week announced reductions in deposit rates, with decreases ranging from 10 to 25bps. The interest rates for 1-year, 2-year, 3-year, and 5-year deposits were adjusted by 10 bps, 20 bps, 25 bps, and 25 bps, respectively, resulting in rates of 1.55%, 1.85%, 2.20%, and 2.25%.

This move was permitted by the People's Bank of China (PBoC) to safeguard banks' net interest rate margins and facilitate potential reductions in interest rates on outstanding mortgages. To gain deeper insights into the context behind the wave of mortgage prepayments and the potential overall impact of lower mortgage interest rates and reduced deposit rates on banks' net interest margins, we invite you to read our in-depth analysis in this article published last Friday.

The PBoC cut the FX Deposit Reserve Requirement Ratio

The People's Bank of China (PBoC) reduced the reserve requirement ratio for forex deposits at banks (FX RRR) from 6% to 4%, effective from September 15th. This move is intended to provide banks with more flexibility to extend foreign currency loans or sell a portion of their US dollar holdings, thus alleviating some pressure on the renminbi. While the CNH briefly strengthened, reactions to this FX RRR reduction, similar to the cut from 8% to 6% in September of the previous year, remained subdued.

China NBS and Caixin PMI data show encouraging improvements in August

China's August NBS manufacturing PMI increased to 49.7, and the New Orders sub-index hit 50.2, marking the first expansion in new orders since March. On the other hand, the Non-manufacturing PMI fell to 51.0, with Services at 50.5, while Construction has strengthened to 53.8. For a more in-depth analysis of the NBS PMIs, you can refer to this note we published last week.

Following a similar upward trend in the official NBS survey, the private Caixin China Manufacturing PMI for August rose to 51, re-entering the expansion territory after a contraction in July. This marks the highest level since the 51.6 print in February. Notably, the output, raw material input prices, new orders, and employment sub-indices all rebounded from contraction to expansion, while new export orders continued to lag in contraction. Overall, the improvements were encouraging signs of recovery.

Data Watch This Week

Loan and aggregate social financing data

The release schedule for August's loans and aggregate financing data is not fixed but could come as early as this Friday, September 8th, or possibly in the following week. According to a Bloomberg survey, it's anticipated that new Yuan loans in August will reach RMB 1,100 billion, a significant surge compared to July's RMB 345.9 billion. This increase can be attributed to regulators' heightened encouragement of banks to lend, along with favorable seasonal factors.

As the Chinese authorities have urged local governments to fulfill this year's issuance quota by the end of September, government bond issuance skyrocketed in August, soaring to over RMB 1 trillion from July's RMB 411 billion. This surge is expected to result in a substantial rebound in the August new aggregate social financing data, estimated to be around RMB 2.8 trillion, compared to July's RMB 528.5 billion. Furthermore, the year-on-year growth in outstanding aggregate social financing is anticipated to tick up to approximately 9% in August, a slight increase from July's 8.9%.

CPI and PPI are scheduled to be released on Saturday

On inflation, the median forecast in the Bloomberg survey projects a moderate rebound in CPI inflation to 0.2% Y/Y in August from - 0.3% in July, benefiting from base effects and surges in food prices. The PPI is expected to contract less and to come in at -2.9% Y/Y versus -4.4% in July. Helping the rebound in the PPI is a low base last year and recovery in some domestic materials as well as global commodities prices.

Caixin China PMI Services is expected to decline

After a full point decline in the official NBS Service PMI to 50.5, analysts, as surveyed by Bloomberg, expect the private Caixin China PMI Services index to decline likewise to 53.5 in August from 54.1 in July.

Growth in exports and imports in August may be less negative

Despite the weak showing of the export sector in the NBS PMI and the Caixin PMI data, analysts surveyed by Bloomberg expected the decline in China’s exports in August slowed to -9.0% Y/Y, from July’s -14.5%. Imports are expected to come in at -9.4% Y/Y in August, versus -12.4% in July. Analysts expect moderate improvements in trade due to less negative trade growth data from some of China’s trading partners and the shift of some trade to August from July due to weather-related port disruption July.