JP Morgan Private Bank Remains Cautious On China, Eyes Property Woes

Editorial Staff

25 August 2022

says it cannot figure out how low China’s embattled property market can go and doesn’t expect a clear rebound for the rest of 2022.

The US bank said it has recently cut its China gross domestic product forecast to 3.1 per cent from 3.9 per cent, arguing that weakness in the real estate sector is a reason. For 2023, JP Morgan Private Bank said it predicts growth of 5 per cent – which is below consensus forecasts.

The woes of debt-laden property developer Evergrande and concerns of an overhang of empty properties and high debt exposure, have cast a shadow over China’s economy. China is also trying to recover from a stringent zero-Covid lockdown policy. Last year, Beijing also slapped down technology sectors such as video games and shut down private after-school education, raising concerns about rising regulatory hostility to certain forms of business.

“For investors, we remain patient on Chinese equities while we await stronger policy actions to restore confidence,” Alex Wolf, Asia head of investment strategy, JP Morgan Private Bank, said.

Wolf said the bank is bearish on the renminbi currency, due to the interest rate gap between China and the US.

“For those who have RMB exposure, we think it makes sense to hedge at current levels,” he said.

“We remain cautious with China’s market outlook. China’s post-Covid economy has been stuck in a challenging growth path with exports as the only bright spot in a hark back to pre “rebalancing” days,” Wolf continued. "There have been mounting losses in the real estate sector, a broad loss of confidence among consumers, and businesses putting investment on hold are causing a sharp drop in economic activity despite stimulus efforts aimed at boosting infrastructure investment.”

Cracks in the wall
Wolf noted that “years of excesses have built up” in the Chinese property sector. “On the developer side, they relied on the pre-sale model to pursue rapid growth, particularly using pre-sales to plug financing gaps whenever domestic liquidity tightened. However, developers sold vastly more properties than they completed,” he said.

He said official data showed that the amount of sold but uncompleted properties in the construction pipeline is “staggering at nearly 700 million square meters.”

“Assuming bailouts eventually allow these to be completed and delivered, that simply represents money that can’t be spent on stimulus elsewhere. Even with this level of unfinished properties, excess supply remains a serious problem,” he said.

There is a vacancy rate of 7 per cent in tier-one cities including Beijing, and 12 per cent in two-tier cities. Overall, vacancy rates are “substantially” above the global average, and data also shows the “vast majority” of purchases since 2018 were for investment and speculative reasons.