For all the excitement whipped up in China's markets by the Politburo last week, foreign investors say policymakers' words will have to be matched by substantive action to clean up an ailing property sector before confidence recovers.
The sector accounts for a quarter of China's economy, yet developers' debts are sliding deeper into distressed territory, with repayment problems mounting while sales crumble.
When the Politburo signalled that there would be changes to real estate policy, along with other measures to boost an economy, it ignited the biggest one-day buying spree in China's stock markets since 2021.
The July 25 rally was enough to lift the benchmark index (.CSI300) into positive territory for the year, but a sustained upturn would depend on policymakers making good on their - so far vague - promises.
"Foreign investors may have started buying more Chinese equities in the hopes that the Politburo was going to herald big, meaningful stimulus, but we would wait until we see more specific measures," said Tara Hariharan, managing director at global macro hedge fund NWI Management LP.
"The question is what resources they will deploy, because China is still very focused on de-leveraging and preventing financial risks."
The sorry state of developers' balance sheets sits right at the top of the risk list.
"Is real estate worth rescuing under China’s current economic model? Absolutely, and urgently," said Qi Wang, the chief investment officer (CIO) of MegaTrust Investment (HK), a boutique China fund manager specializing in domestic Chinese A-shares.
But investors should be cautious and patient, said Wang, noting the lack of detail from Politburo last week. China “requires more drastic measures than what we have today," Wang wrote on his Substack.
Finding a way to restore the property sector's health would have greater impact on the economy, than tax cuts or growth in the technology sector would deliver.
It would unlock consumer spending by homeowners who have lost faith in a housing market, where they have stored their wealth.
Mark Dong, general manager of Minority Asset Management, based in Hong Kong, has reduced his exposure to the property sector. "The sentiment is bottoming, but there is lack of catalyst. It seems that there are no substantive measures yet to help developers, such as bailing out the troubled developers. "
A national-level loosening, such as cutting loan down-payment ratios, is the sort of big gesture necessary, said Bo Zhuang, a senior analyst on the macro strategies group at Loomis Sayles Investments Asia.
'SOMEWHAT CHALLENGING'
Jingjing Weng, head of Chinese equities research at Eastspring Investments in Shanghai said last week's rally was largely driven by short-covering.
"The key is when and what specific measures will be followed," said Weng. "Investors are still more on a 'wait and see' approach as they need to see a more sustainable rally in the Chinese equity markets before going back in."
Foreigners' net stock purchases of 19 billion yuan ($2.7 billion) on July 25 were the largest one-day rush in a year and a half.
For the year, however, net buying sits around 230 billion yuan, having more or less stalled after net inflow of 186 billion yuan in the first quarter as economy lost its post-pandemic bounce.
Rob Hinchliffe, portfolio manager portfolio manager and head of global sector cluster research at PineBridge Investments, based in New York said their exposure to China is lower than a year ago.
Investing, Hinchliffe said, is "somewhat challenging in China, given some of the top-down decisions that are made. We are underweight China overall now.”
Wai Mei Leong, fixed income lead portfolio manager at Eastspring Investments, says her fund only picks property firms owned or affiliated to the government and the sector's recovery will drag on for 2 to 3 years.
NO CONFIDENCE
Anxiety over the debts that developers were carrying had festered for much of the past decade. The crunch came three years ago, when worried authorities restricted developers' borrowing and upended a business model that depended on loans and pre-sales to fund construction.
China Evergrande Group, the most indebted developer, collapsed and unfinished projects dotting cities froze the market.
As the relaxation of COVID-controls failed to bring a sustained rebound in sales, even the more stable developers such as Country Garden (2007.HK) started to struggle with cash flow.
Speculators brave enough to put money in developers' stocks and bonds last year were rewarded by the rally sparked by the Politburo's assurances. But larger players say that is no basis for longer-term investing given the fundamental problems developers are facing.
"No one's got confidence on how these companies are going to survive," said one fund manager looking after an emerging market credit portfolio for a U.S. asset manager, who declined to be named as they are not authorised to speak publicly.
"Without asset sales or selling of houses - which is declining - how are they going to come up with the cash?" he said. The safest bets in the sector, he said, had come down to state-owned companies such as China Resources Land (1109.HK) and Poly Property (0119.HK).
($1 = 7.1640 Chinese yuan renminbi)
