ANZ Warns Of Bubble Burst In Hong Kong’s Residential Property Market

In this episode of China Money Podcast, our host Nina Xiang reviews the latest news from the week of March 25 to April 1, 2013.

– China’s official PMI (Purchasing Managers’ Index) number rebounded significantly in March, consistent with the rebound shown in the HSBC PMI released earlier. The statistic further supports the view that China’s economic recovery is gaining momentum.

cmp-new-audio-lowres-1400x1400– Economists agree that 2013 will have a "tiger head, snake tail," meaning a strong first half and more headwind during the second half. Investors should stay cautious for more tightening measures from the government on the property sector (and potentially from China’s Central Bank) during the second half of the year.

– ANZ issues a report calling for a residential property bubble burst in Hong Kong. During the past 12 months, Hong Kong’s economy expanded 1.4%, but residential property prices have increased 23%, surpassing the previous peak set in 1997. ANZ estimates that Hong Kong’s actual residential property prices at the end of 2012 are 24% higher than its fair value, and are headed for a correction.

– Historically, a widening gap between actual price and fair value (like it is right now) has preceded a significant price correction. For example, the fourth quarter of 1997, second quarter of 1998 and fourth quarter of 2008, all registered price declines of more than 16%. That provides some indication of the extent of the price correction.

– Alliance Bernstein releases a report on China’s listed banks performance from fourth quarter of 2012. Overall results beat market expectations by 1% on average, which Alliance Bernstein explains are made possible by the following factors: 1, net interest margins were up 2 basis points quarter over quarter, while the market expected a 5 to 10 basis point decline. 2, fee income grew 25% for the group, in particular in cards and custody businesses. But watch out: Alliance Bernstein predicts that net interest margins will compress 5 to 10 basis points in the fist quarter of this year.

– Standard & Poors released a report on China’s shadow banking sector last week. The U.S. rating agency estimates that China’s shadow banking is as large as RMB23 trillion (US$3.7 trillion) at the end of 2012. That’s equivalent to 34% of the total loans in the banking sector and represents 44% of China’s GDP in 2012. This 44% ratio compares with 111% for G20 countries and the Euro-zone.

– But after careful analyses, S&P doesn’t believe that China’s shadow banking has reached a point to destabilize China’s financial system. It is because: 1, the size of China’s shadow banking is relatively modest compared to the regular banking sector; 2, the risk profile of shadow banking products are not all rotten apples. Only a small portion may become bad; 3, the official banking sector is in a relatively healthy state when you consider capitalization, earnings and funding profiles.

Caishen.Co - Primary Data for China Secondary Investment and Stock Markets
Caishen.Co - Primary Data for China Secondary Investment and Stock Markets