What to look out for at China’s National Congress

China enters a major political leadership transition this month at the country’s 19th National Congress. Private real estate executives will be monitoring proceedings for indications relating to three areas.

 1. Currency, stocks and cross-border trade During a time of transition, the sector’s focus will be on a stable economy. That means new leadership will need to make discernible efforts to protect against large currency or stock market fluctuations and definitely no more restrictive news on overseas investing and borrowing. The yuan has been volatile, with 2016 seeing a 6 percent weakening versus the dollar, and equities distress has prompted the country’s international investors to slow domestic deployment and hoard foreign currency, directly or through outbound investing, often in real estate. The People’s Bank of China set the strongest yuan fixing, at 6.49 against the dollar, in a year at the end of August, a signal policymakers are comfortable with today’s renminbi strength. Even stabilized, foreign managers using dollar capital in China must consider hedging costs as the real China interest rate – 3.1 percent – continues to be higher than in the US at 2.1 percent, according to the World Bank. And that makes it less competitive than onshore money. As such, debt financing has become more important given its natural hedge qualities and as it lessens exposure to the yuan.

2. Restricted, not banned In late August, China’s State Council issued formal guidance on Chinese overseas investments, distinguishing between ‘encouraged,’ ‘restricted’ and ‘prohibited’ outlays. It called out real estate as an area where “irrational” acquisitions would be stopped. A shake-up in the government is not expected to dramatically change the direction of travel. But how these measures are implemented will be closely watched, says Sam Xie, head of research, China at global property consultancy CBRE. “New measures have just come in so government will continue to closely monitor this issue and track the effectiveness of the guidance. Any update at the congress should only look at the implementation of the measures,” he says. “The pace of outbound growth will slow, but it remains a focus of the government that Chinese groups diversify and become global.”

3. Game of loans With an eye on the systemic threat that comes with cheap credit flooding into the financial system Beijing tightened the screws on speculative financing over the past few months. This is expected to remain a focus post-congress. Chinese authorities are already reportedly requiring banks to provide information on overseas loans made to a few highprofile Chinese investors: namely, Dalian Wanda Group, Anbang Insurance Group, HNA Group and Fosun International. These organizations, together with other Chinese corporates, invested a record $220 billion in overseas direct investment in 2016, according to government data. HNA said in August its financing costs more than doubled, surging from 14.2 billion yuan ($2.2 billion; €1.8 billion) from 6.47 billion yuan a year earlier, according to its semi-annual report. According to Bloomberg, the company’s earnings before interest and taxes therefore were insufficient to cover those costs. One of China’s largest property developers, Greenland Holdings, meanwhile, revealed overdue loans of 457.5 million yuan, underscoring the company’s mounting debt problems with total reported debt increasing by about 19 percent last year. Expected de-leveraging policies and restrictions on bond issuances will mean that lending costs in China increase, says CBRE’s Xie. So far, domestic developers have responded by looking to raise more equity capital and it is expected that the government will be supportive of these endeavors. To bleed leverage from the financial system there is also expected to be more activity in the $219 billion nonperforming loan market, particularly in terms of book sales. International investors have landed only a few such sales. And they have been small too, while no official data regarding aggregate size have been released, sources say the $100 million mark has rarely been exceeded, with Chinese capital often prevailing at auction.