What's behind the decline? — Speculation on reasons behind the fall include: 1) August lending is rumored to be below the market expectation of RMB400-500bn; 2) State Asset Bureau ordered SOEs to look into their outstanding derivative contracts, which could potentially lead to renegotiations with counter party foreign investment banks; and 3) Large IPOs being announced.
What do we think? — We believe the fundamental reasons behind the fall are as highlighted in our 18 August report1 that: 1) incremental liquidity is seeing decelerating momentum as bank lending slows, 2) maturing discounted bills rolling into longer term loans, 3) IPOs resumption, and 4) pick up in restricted shares selling off.
High property prices triggered the policy adjustment — We believe the area that triggered the government’s adjustment in its loose monetary policy was the high property prices which in first tier cities have already surpassed their 2007 peak. In order to reign in the ‘run away’ market, banks have made second mortgages much more difficult to obtain. Also rising prices start to cut into people’s affordability. As a result, transaction volumes peaked out towards the end of July in some areas.
September/October will become key months to look out for property market development, which also has a significant implication on stock markets — As we believe property remains the leading sector for both the Chinese economy and stock markets, whether we will see recovery in the upcoming peak season of property launches in September/October will have a deciding impact on market direction. We believe volume recovery has to be driven by some pricing declines. Thus, a more realistic approach from developers would likely please the government and invite buyers back. Otherwise, it could lead to further constraints from policy, which could also hurt stock market liquidity flow and sentiment.
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