China: over-reliance and under-performance | FT Alphaville

China: over-reliance and under-performance

Wonder why everyone is so scared about a possible Chinese slowdown? Here’s a stat for you: China is now forecast to contribute 28 per cent and 30 per cent of global growth in 2011 and 2012, respectively.

That’s an updated prediction from a concerned Citigroup note entitled “Is China all that’s left?”, and takes into account recent downward revisions to growth in the US and Europe. It’s an awful lot of weight to carry for a country that is showing several signs of homegrown stress.

Nomura, for example, says on Friday that the Chinese credit crunch is worsening. In a short note it uses the gap between Shibor (the interbank interest rate in Shanghai) and the bill discount rate (how much banks charge firms when they exchange commercial bills for cash) to gauge the current level of the funding squeeze. At 5.7 per cent, the gap is the highest since data became available, according to Nomura.

The recent spike may be down to rising bill rates for property developers, which are suffering from poor sales figures, says the bank. This sounds highly plausible given concerns that the Chinese property bubble is about to go pop. Markit’s Gavin Nolan reckons this is what could now be about to happen:

Official data shows that property prices rose by 60% since 2006; some private estimates put the figure much higher. Real estate developers have been borrowing frantically to fund the breakneck expansion in housing. In short, China has what looks like an old-fashioned property bubble. And it now appears that the bursting point could be approaching. Developers are losing access to funding and prices are starting to fall. Half-built residential apartment blocks are now a regular feature of most cities, according to reports.

None of which has escaped the attention of the shorts. Real estate worries drove the Hong Kong equities long:short ratio (a proxy for investor sentiment) to 5.4 last week, a two-and-a-half year low, according to the research firm Data Explorers. Shares out on loan remain at an absolutely low level (around one per cent) but this has doubled in the last month and is limited by the paucity of lendable supply — institutional ownership is only 5 per cent of total shares.

A disproportionate number of these stocks are in real estate, and many of them are China-based, adds Data Explorers:

Of the 300 stocks screened, a fifth of these see short interest at above average levels. Drilling further into this group a quarter of these are Real Estate stocks, despite the sector recording short interest at an average of 0.9% of total shares, up 58% on the month. Stocks seeing the greatest short interest include Poly (Hong Kong) Investments Ltd. (HKG:0119) at 7.9%, China Resources Land Ltd. (HKG:1109) at 6.3%, China Overseas land and Investment Ltd. (HKG:0688) at 6.0%, Hopson Development Holdings Ltd. (HKG:0754) at 3.3% and KWG Property Holding Ltd. (HKG:1813) at 3.1%. This is not surprising given the ongoing concerns in the booming sector as the government continues to curb lending to developers and traders begin to digest evidence of falling prices in the sector.

Throw in Friday’s confirmation of a contracting September PMI and it seems that many signs are pointing downwards. We’re not Chinese experts — for one of those listen to our AlphaChat podcast — but there is increasing scepticism about China’s ability to prop up a stuttering global economy. Not least because the more the rest of the world suffers, and the Chinese stimulus dwindles, the more China’s still export-dependent economy will contract. And that’s bad news for the rest of the world supposedly supplying two-thirds of global growth for the next year.

Related links:
Squeeze on developers cheers China – FT
Shift in Sentiment Toward China’s Internet Darlings – WSJ
A guide to China CDS – FT Alphaville