A key topic at the National People’s Congress, China’s rubber-stamp parliament, which opens on Friday, will be how to curb the country’s property bubble. Wen Jiabao, the prime minister, has said it is a priority to stop prices spiralling away.
Even China Vanke, the country’s largest property developer by market share, says it expects prices this year to "stabilize".
So I would describe the decision by UBS and JP Morgan to label the Chinese property sector "a buy" as fairly contrarian.
Analysts at the investment banks say that the share prices of property companies has plunged this year and concern over stricter lending regulations is overstated.
Property shares have been among the worst performers on the Shanghai index this year, declining by 3.6% against a rise of 14% for the market. Price earnings ratios have fallen from 43 times last July to 27 times this year’s earnings.
"Concerns over policy tightening have impacted sector performance recently, while the sector’s valuation has largely been ignored," says Zhang Haiyun at UBS, upgrading the bank’s view from "neutral" to "positive". Bank of America/Merrill Lynch and Credit Suisse are also bullish, but Goldman Sachs is pretty bearish.
Well, it’s a bold gamble by the analysts. I hope that their sources inside the Chinese government have told them that the upcoming measures to curb the property market are worse in bark than bite.
The situation, of course, varies hugely across China, but there are two things I would bear in mind when considering the property sector. The first is that many developers are encouraged, and often financed, by local governments. This means that the market is not determining how many projects get built and there could potentially be an enormous oversupply, especially in commercial property.
The second is a simple look at the macroeconomics. Property prices have risen an average of 24% in the past year, while incomes have increased by a fraction of that rate. Sooner or later, something is going to have to give.