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ASIA NEWS: Shanghai surprise

It is a classic case of déjà vu, just not the pleasant kind. China’s equity investors have had a turbulent start to the year, with a stock market plunge reminiscent of last summer’s market rout that caused trillions of dollars in losses.

The first day of trading in 2016 saw the Shanghai Composite and the broader CSI 300 index both fall by nearly 7 percent, leading to suspension of trading under the newly implemented circuit-breaker guidelines. Another free fall followed only days later, leading to a second round of trading suspension in a week.

The ensuing volatility was enough for the regulators to decide to remove the circuit-breakers within four days of launch. But the untimely demise of the mechanism hasn’t reduced renewed concerns about China’s economic health and its spill-over impact on global markets.

According to Gregory Wells, managing director and head of Asia-Pacific at London-based private equity real estate firm Forum Partners, China’s stock market volatility may have been triggered by the January 8 expiry of a bailout measure introduced by the government last year prohibiting major shareholders from selling their shares for six months.

“A lot of retail investors must have decided it was good time to get out and as prices started falling and investors saw the circuit-breaker looming, it created a snowball effect. The problem was that the circuit-breaker was set too tight at 7 percent. In the US, it is 20 percent,” said Wells.

The private real estate industry, however, wants to wait it out before the alarm bells sound yet again. Several investment managers have told PERE the stock market jitters are more surface noise and do not threaten the long-term fundamentals of a transitioning economy. If anything, the prevailing negative sentiment could increase the scope of distressed and opportunistic investments in China. At press time, Kohlberg Kravis Roberts (KKR) announced the formation of a joint venture partnership with two Chinese investment platforms – China Orient Summit Capital and China Orient Asset Management – to invest in credit and distressed deals in China, with a particular focus on real estate.

“There is no positive correlation between the Chinese equities and real estate market,” said James Pan, chief executive officer of Everbright Ashmore. Over 80 percent of the equities market, after all, is dominated by retail investors who are more speculative and have a different investment philosophy than the institutional investors that invest in real estate, he said.

A fluctuating RMB doesn’t help, however. A Chinese real estate fund manager told PERE the currency swings could cause domestic fund managers to rethink launching dollar-denominated funds given the associated hedging costs, and focus on domestic capital raising via RMB-denominated funds instead.

In Wells’ view, the impact of a perceived currency weakening globally would be so negative that the authorities would try to minimize devaluing the currency too much going forward.

Yet research reports do not forecast the market turmoil to have a strong material impact on investment activity. According to a January report from CBRE, some foreign investors could adopt a wait-and-see approach, but the market uncertainty could actually prompt more opportunistic investment deals. Amid declining interest rates, domestic investors would also display a stronger appetite for core assets in Tier 1 cities, the report said.

Moreover, weakening macroeconomic fundamentals would only lead to enhanced policy support for the housing market in the form of monetary easing, tax incentives and reforms in the hukou, a household registration system in China, as predicted by a CLSA outlook report on China released last month.

In fact, data released by the National Bureau of Statistics indeed points towards a price recovery in many housing markets in China, with new-home prices reportedly having increased in 39 of the total 70 cities surveyed in December.

With so many moving parts in China’s story, the uncertainty about the fate of its economy is not quelling soon. The scenes unfolding this year are evidence enough.