Global bank expects China to stabilise property with policy easing

Policymakers are anticipated to further ease mortgage quotas in hopes to boost bank loans 

Despite fluster from investors over the Evergrande crisis and concerns of its widespread consequences, Morgan Stanley has upgraded China’s property sector to “attractive”, reported CNBC.  

The bank said that Chinese real estate stocks will be supported, as policy easy of the property sector is believed to kick in.  

Elly Chen, equity analyst at Morgan Stanley, said, “We believe the default risks and property market weakness have been largely priced into property stocks. Property stocks will react on policy easing, which looks more likely now.” 

“There have been several defaults since 2020 and escalating risk for a major developer default in 2021,” Chen acknowledged.  

For the next six to 12 months, she wrote that this “adjustment process” of reducing debt and policies to “manage system excesses” will likely continue.  

“However, property stocks are pricing in part of these risks, and we think systemic risk is manageable,” Chen said. 

Last year, authorities rolled out the “three red lines” policy that limits debt in relation to a firm’s cash flows, capital levels, and assets, since China’s property developers have been growing rapidly from years of excessive debt.  

Evergrande, the world’s most indebted developer, was downgraded by rating agencies on tight liquidity and default risks.  

However, Morgan Stanley said a “policy inflection point in approaching.”  

There may be “potential upcoming easing measures,” as policymakers are anticipated to additionally ease mortgage quotas in hopes to boost bank loans.  

“Policy is the most important leading indicator for property stocks,” Chen said. 

According to Morgan Stanley, property-related services account for 7.3 percent of China’s GDP, while residential property investment accounts for 6.5 percent.  

“Further spillover could take the form of a negative wealth effect, dampening private consumption,” Chen noted.  

More: China encourages banks to help the property market and homebuyers

As a result, policymakers will likely provide “meaningful” easing to stabilise the property sector and support the economy. 

In regards to attractive valuation and more potential supportive measures directed at boosting the real estate sector, Morgan Stanley has upgraded the China property sector to “attractive”.