x Abu Dhabi, UAEThursday 18 January 2018

Shanghai's return to former glory contains hidden dangers

Shanghai is once gain the financial and development hub of China but potential bubbles in the property and stock market sectors lurk on the horizon.

The rebirth of Shanghai as the financial capital of China is complete with the city also witnessing a property boom amid fears of potential bubbles in both sectors.
The rebirth of Shanghai as the financial capital of China is complete with the city also witnessing a property boom amid fears of potential bubbles in both sectors.

Once vilified as an evil capitalist tool by the zealous communist government of Mao Zedong, share ownership has become all the rage among China's burgeoning middle class. And Shanghai is where the country's main bourse can be found.

The country's reborn financial capital is also home to some of China's most expensive properties and fears of bubbles in both stocks and property are feeding off each other and could pummel the city if they burst. Owning a home has become a pillar of the economy, with property investments alone accounting for about 12 per cent of the country's GDP. Property prices in 70 of China's large and middle-sized cities climbed on average 7.8 per cent in December, compared with the same month in 2008.

Among other moves to stimulate spending during the global economic downturn, China pumped money into the economy to boost domestic demand and maintain its impressive growth record. And much of the money borrowed from banks has gone into the property market and the Shanghai Stock Exchange. Now fearful of a wave of bad debt and of accelerating inflation, the government has tightened lending for property, forcing Chinese developers to turn to the capital markets for funds.

Earlier this month, Poly Real Estate, the country's second-biggest property developer by market value, said it planned to raise up to 9.6 billion yuan (Dh5.16bn) through a private placement of shares and would use this to fund expansion. Under the plan, Poly would sell 700 million shares to select institutional investors and use the proceeds to fund 12 property projects. The group said its profits climbed 50 per cent last year, which was not bad during a global economic slowdown.

China Vanke, the country's biggest property developer by market share, saw its net profit rise 32 per cent last year on the back of soaring residential and commercial prices. The bourse itself, built in 1997, is an incredible sight: it features Asia's largest trading space at 3,600 square metres, with no pillars to be seen. The traders sit in neat rows, all in a square. You will not find a bear pit here. But beyond this calm, there are bubble fears building amid all the confident talk.

"The stock market is OK right now. I'm loving it," says Alibaba Zhan, who runs a private equity fund. "In the long term, I think the China stock market will be a bull market. But it is a slowly developing and strong bull. Short term, it is hard to estimate, but in the full year I think China's stock index will have a surge. "The real estate market has already got big bubbles. Their prices in the stock market are not cheap. Kind of tricky. I think they are a bit risky, since they are unpredictable. So we try to avoid them."

Zhang Qi, an analyst at Haitong Securities, is similarly bullish. "China's economy is still developing, so the stock market will certainly rise. This year, since the central government's monetary policy is tightening, I think China's stock market will have some fluctuations," he says. "China has had a real estate industry bubble for many years. It has not just happened suddenly." There are several reasons for this, he says, including the way land is parcelled out in China, the increase in the money supply and the country's wealth gap, because the rich are prepared to pay dearly for property as an investment. "As far as real estate company stock goes, we've seen prices come off by 30 per cent or 40 per cent since July. For companies like Vanke, Poly and Gemdale, their [price-earnings] ratios are around 20 or less than 20. So I think the prices are fine," Mr Zhang says.

The stock market itself is volatile. One of the earliest signs of China's growing economic influence was when a one-day drop of nearly 9 per cent in February 2008 prompted a massive sell-off in US and European stocks, despite its relative lack of scale at the time. But the authorities are trying to smooth out the wrinkles. China's stock regulator said this month it had approved the first batch of six brokerages to conduct business in a pilot scheme for margin trading and short selling of stocks that is due to be launched shortly.

Short selling is the sale of borrowed shares and replacing them later, in the best case with stocks purchased at a lower price. Margin trading is providing collateral to a broker in order to trade stocks on account. "I think in future, government will map out the stock market better," says Mr Zhang. "Last year, Shenzhen Stock Exchange launched its growth index. And in future the Shanghai stock market will have the international board.

"This year, China also is going to launch stock index futures and shorting and margin financing. I think China is improving its stock market, making it a multilayered and structured market." business@thenational.ae