The Daily Update: China Property Market / New Renminbi Bond Fund

Earlier this month one of China’s top banking regulators expressed concerns not only for global asset bubbles in markets, but also closer to home with China’s housing market. The chairman of the China Banking and Insurance Regulatory Commission and Party Secretary, Guo Shuqing, believes that bubbles in both European and US markets could pop as their underlying economies are heading in the opposite direction and there will be a correction ‘sooner or later’.

When it comes to the Chinese property market, China has begun to limit lending to house buyers and property developers in cities where the cost of buying a home is increasing too rapidly. Along with cracking down on speculation, regulators have informed banks to tighten lending criteria and required home buyers to have social security records in localities where they intend to purchase. The aim is to stop people buying properties for investment or speculative purposes, as has happened in the past, causing property bubbles which Guo stated are ‘very dangerous’. Such a bubble was seen in Shenzhen, where authorities stepped in as prices jumped more than 34% in 2020. The new restrictions in Shenzhen mean estate agencies are not allowed to publicly market houses with prices higher than the official reference.

However, according to the director of E-house China Research and Development Institution, Yan Yuejin, these interventions will remain rare as the government will seek to strike a balance between preventing excessive house price inflation and undermining the property market. Falling prices would hit not only house owners and buyers, but also local governments, which rely heavily on revenue from land sales.

An additional policy long discussed among government advisors would be a more widespread tax on property. Since 2011 two cities have been experimenting with levies on property. Shanghai taxes people who own more than two homes with an average space of more than 60 square meters. In Chongqing, property tax is based on family living space. However, so far neither model is mature enough to be introduced widely, advisors said.

Currently, the taxes are too low to meet the government's objective of making them a major source of local revenue, but the risk of setting them too high might undermine the market, according to director of a fiscal studies institute, Zhang Yiqun.

As it stands, widespread property taxes will probably not be viable until China's urbanisation rate rises to 75% from the c.60% it is today, he said. In the new Five-Year Plan published last week, the government committed to increasing the ratio to 65% by 2025.

Whilst talking about China, as you may know, Stratton Street has been managing unconstrained credit portfolios since the mid-2000s. Our longest running strategy is a Renminbi Bond fund (launched in 2007) which has produced an annualised return of 8.71% (USD A Class since inception as at 26 February 2021) by investing in the credits of the world’s wealthiest and least indebted nations, economies whose net foreign assets dwarf that of most developed nations. We are planning to launch a UK domiciled and FCA regulated version of the Renminbi Bond fund in the Spring due to an increase in demand from investors wanting to diversify their fixed income portfolios into less correlated, high quality credits, that offer greater value and yield than is available in developed market investment grade credit.

We will send a daily next week explaining why we think our Renminbi bond fund strategy is something we believe you should seriously consider to diversify your fixed income portfolio.