Top News of the Week
Research on Beijing Existing Home Sales Reveals Interesting Statistics
Nearly 60% of existing home sales in Beijing were paid in full, with cash since tightening policies were introduced in April significantly up from 39% before April and the highest since 2007. This is according to a recent study by Everbright Bank, China's sixth-largest lender by asset size, and Beijing-based property agent Homelink. The study also found that those who could not afford to pay off in full tried to borrow less; the average mortgage was 47% of total home value, down from 49% before the tightening.
Beijing, which saw housing prices skyrocket over the past several years, was a major target for harsh tightening policies that raised borrowing costs and restricted loan access for buyers who own multiple units, all to curb speculation. The research findings seem to indicate that the policies are starting to work by squeezing out speculators who mostly rely on mortgages to finance their purchases. Existing home purchases funded by mortgages accounted for a multiyear low of 31% of total transactions, down from 47.5% before the tightening. The decision to delay home purchases by many first-time buyers who depend on mortgages also contributed to the decline.
However, the report found that the housing market in Beijing may remain tight for many years, as more people decide to buy homes at a younger age, thus pushing up housing demand. The average age for mortgage applicants has been falling steadily in recent years, from 34 in 2007 to 32 in 2010. An average first-time mortgage applicant in Beijing is only 27--barely five years out of education with limited savings. These applicants are usually helped by parents and grandparents who are happy to chip in with down payments and see their children settle down. The fear of further price surges that make home ownership beyond reach is another factor spurring many young adults to plan for home purchase at an earlier age than their peers in other countries.
Market Recap
Concerns about a sputtering global recovery weighed on the Chinese market, although plans for economic development zones in inland regions and the proposed overhauling of drug distribution led investors to remain hopeful that China is pushing through necessary restructurings for more sustainable long-term growth. The Shanghai and Shenzhen indices fell slightly last week, down 1.2% and 0.5%, respectively.
Macro and Industry Updates
Major Banks Report Slowing Growth in Loans and Deposits
Interim results from China's largest four banks show that total loans grew 10.9% from the end of 2009, compared with a 6.6% increase in the first three months, as the banking regulators reined in lending. A recent decision to require banks to transfer off-balance-sheet lending back onto the balance sheet will force banks to increase reserves, further hampering their ability to extend credits. Deposit growth also slowed in the second quarter, during which a war erupted among major state-owned and commercial banks over deposits from corporate and household clients. Many banks were scrambling to bring in more deposits to bring their loan/deposit ratio down to 75% as required by regulators. As of June, the ratio at Bank of Communications was 77%, exceeding the upper limit, while that of Bank of China stood at 73%. Thanks to recent convertible bond and rights offerings at Bank of China and Bank of Communications, their balance sheets are in better shape, with higher capital adequacy and Tier 1 capital ratios compared with the end of 2009. ICBC and China Construction Bank saw their capital adequacy ratios fall in the first six months, but both have massive rights offerings scheduled later this year to shore up the balance sheet.
Steelmakers Face More Headwinds in Second Half
China's largest steelmaker, Baosteel, reported a 50% year-over-year increase in revenue for the first half of 2010, to CNY 98 billion, thanks to better steel prices and higher sales volume. Interim reports from the other two dozen or so steelmakers showed similar trends compared with the year-ago period, but we expect comparisons in the second half to be less favourable. Hopes of a speedy economic recovery in the first half brought much idle capacity back to production, leading to inventory buildup and downward pressure on steel prices that we believe will persist in the near future.
Although steel prices have seen a minor uptick in the recent weeks since hitting a one-year low in July, inventory is still 60% higher compared with the end of 2009. Moreover, we expect demand for steel to sag in the coming quarters, given sluggish orders for durable goods and automobiles. Continued tightening in the property market in the remainder of 2010 is another negative factor. In our opinion, the implementation of mass housing projects and infrastructure construction in western China may be a catalyst for improved steel supply and demand dynamics, but it may take many months for the projects to reach the scale that can influence the steel market. We think major steelmakers can also benefit if the government can enforce the order to shut down 200 or so small and midsize mills by September.
