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China’s Bear Market Attracts Locals Seeking Safety

By Bloomberg News

May 13 (Bloomberg) -- Chinese equities slumped into thesecond bear market in nine months this week. Pan Weiting saysthere’s no better place to put her money than in stocks.

Pan shelved plans to buy an apartment after real estateprices jumped the most on record and the government banned loansfor third homes to cool the economy. Interest on the 400,000yuan ($59,000) she has in her bank account is being eaten awayby rising inflation, and the country’s regulations limit herinvestment choices to property or domestic equities.

“The stock market is the best choice for the moment,”said Pan, a 27-year-old Shanghai accountant. “Even the bankstaff advised me against depositing more money.”

Government leaders sought to deflate a speculative bubblethat Knight Frank LLP said sent property prices up 25 percent inthe fourth quarter by curbing mortgage loans, leaving people inthe nation with the world’s biggest savings few places to puttheir money. JPMorgan Chase & Co. expects China stocks to rallymore than 40 percent in a year, while Robeco Group and MacquarieGroup Ltd. forecast a second-half rebound.

“It becomes a question of who’s the least ugly girl at thefair,” said Victoria Mio, a Hong Kong-based senior fund managerat Robeco, whose firm oversees $194 billion worldwide. “Thereis some migration occurring and the shift will accelerate with afew months of negative interest rates.”

Falling Home Prices

Citigroup Inc. of New York and Paris-based BNP Paribaspredict a 20 percent drop in home prices in 2010, after Chinesepolicy makers increased bank reserve requirements three times inthe past three months to slow lending.

As much as $59 billion, about a third of housingtransaction volumes in the 35 biggest cities in 2009, may bediverted from property to equities this year, according to CiticSecurities Co., China’s biggest listed brokerage.

Saving money has been a cultural touchstone for the Chinesesince the government dismantled the so-called iron rice bowl oflifelong job security following economic reforms in the 1990s.The measures “significantly increased the incentive forprecautionary savings,” People’s Bank of China Governor ZhouXiaochuan said in a February 2009 report.

The nation’s savings ratio stood at 54 percent of grossdomestic product in 2008, the highest among major economies inthe world, according to data compiled by the World Bank. OnlyLibya, Kuwait and Azerbaijan rank higher.

Savings

China’s $7.2 trillion of corporate and household savings isbeing eroded as inflation rises. Consumer prices climbed 2.8percent in April, surpassing the one-year savings rate of 2.25percent.

China’s real-estate prices surged by a record 12.8 percentin April and the economy expanded 11.9 percent in the firstquarter of 2010, the most in almost three years, after a 4trillion yuan stimulus package and unprecedented new loans of9.59 trillion yuan helped revive growth last year.

The nation’s inflation rate is forecast to climb 3.4percent this year, according to the median estimate of 18economists surveyed by Bloomberg on May 11.

The Shanghai Composite Index fell to as low as 2,647.57this week from as high as 3,338.66 on Nov. 23, a more than 20percent drop that’s the common definition of entering a bearmarket. Stocks rebounded yesterday and rose for a second daytoday, climbing as much as 0.9 percent. The measure gained 0.3percent to 2,664.22 as of 10:12 a.m. in Shanghai.

‘First Choice’

“Chinese stocks would be their first choice of investmentbecause they may remain cautious about the property market inthe short term,” said Shi Lei, a Beijing-based analyst at Bankof China Ltd., the biggest foreign currency trader. “The fixeddeposit would be their last choice.”

Chinese stocks are restricted to a limited number offoreign funds, with most overseas investors buying the sharesthrough exchanges such as Hong Kong.

BlackRock Inc. based in New York is selling Chinese stockson expectations that economic growth has peaked, while StateStreet Global Advisors of Boston has an “underweight” as theshares are pricier than smaller developing nations. New YorkUniversity Professor Nouriel Roubini, who forecast the U.S.recession more than a year before it began, said May 12 thatChina’s overheating economy risks a slowdown. The Shanghai gaugetrades at 15.6 times estimated earnings, compared with themultiple of 12 for the MSCI Emerging Markets Index.

‘Breather’

Logistics company owner Hu Jielin says Chinese equities arestill the best investment choice. He spent 9 million yuan buyingapartments in Shanghai, where average home prices have risenthreefold in the past five years, according to data fromShanghai Uwin Real Estate Information Services Co. andeHomeday.com.

Hu, 33, said he won’t buy more property given thegovernment’s curbs. Instead, he plans to double his stockinvestments in the next six months to 3 million yuan ($439,284).

“Property prices are probably going to take a breatherwith the current tightening,” said Hu. “Currently stocks lookthe best bet.”

For Pan Weiting, equities also trump homeownership for now.She doesn’t plan to resume her search for an apartment inShanghai’s eastern Pudong district until prices decline by 20percent.

“It’s always good to own the roof over your head,” shesaid. “But you’ve got to be able to afford it. For now, it’sout of my reach.”

--Chua Kong Ho and Zhang Shidong in Shanghai. With assistancefrom Kevin Hamlin in Beijing, Judy Chen in Shanghai and RichardFrost in Hong Kong. Editors: Allen Wan, Alan Mirabella.

To contact the Bloomberg News staff on this story:Chua Kong Ho in Shanghai at [e-mail];Zhang Shidong in Shanghai at [e-mail]

Last Updated: May 12, 2010 22:14 EDT