Trillions of renminbi created by China’s stimulus measures have flowed into property investments, and Beijing has taken notice. Our initial investment in Vanke was an attempt to profit from a situation where Chinese borrowers couldn’t find anything better to do with their money than fund unproductive assets. But Vanke’s weak December sales are an early consequence of the Chinese government’s austerity measures to calm the housing market. The People’s Bank of China has started to apply contractionary policies, and the Chinese government has increased regulations on property sales to impose a minimum down payment and remove tax breaks that encouraged the purchase of second homes.
Speculation is easing – Vanke’s sales rose 47% year-on-year in November, but only 3% in December. We consider that a harbinger of an impending fall in Chinese housing prices. Even if this doesn’t lead to a complete housing collapse, the potential returns from holding onto Vanke don’t look enticing. Wang Shi himself asked, “When the market changes or turns bad suddenly, what shall we do?” We know our answer – we won’t be staying with Vanke, even if it means taking a 15% loss.
On the other hand, we’re keeping our holdings in China COSCO (601919). China’s new role as the biggest exporter in the world means that any company that is assisting in the transportation of billions of dollars of goods into and out of China is well-positioned to benefit from an uptick in global trade. And of course, COSCO’s bulk shipping business continues to benefit from China’s voracious appetite for commodities.
The Capitalist Roader Fund is down 33.8% from June 3, 2008. The Shanghai Composite Index is down 8.9%.