News Alert: Introduction of more monetary supports from the government
- The PBoC expectedly announced a RRR cut of 25bps on Friday, but at a magnitude that is smaller than market expectations.
- This shortfall was more than offset by the positive surprise over a rumour relating the Jiangsu government having coordinated the city government of Nantong and China Huarong to set up a Rmb10bn fund for quality POEs to deal with near-term liquidity issues
- If the rumour holds true and is not intervened by the central government, more provincial governments may follow suit and offer decent help to liquidity stretched POE developers
- Recent series of support from local governments indicates their more proactive stance in controlling credit risks within the China property sector; more monetary supports should be on the way and support the current round of sector share price rally
- We recommend to stay with Longfor (960 HK), COLI (688 HK) and CR Land (1109 HK) among the large caps, and COGO (81 HK) and Yuexiu (123 HK) among the mid-caps to ride on this rally.
What’s new?
The PBoC announced a RRR cut of 25bps for commercial banks with effect from 25th Apr, with small commercial banks that has no cross-province operations and rural lenders currently with a RRR of above 5% to see a further reduction of 0.25ppt. The cut will release about Rmb530bn of long-term liquidity into the financial system.
Meanwhile, it is also rumoured that the provincial government of Jiangsu have, under Vice Premier Liu He’s guidance, coordinated the city government of Nantong and China Huarong Asset Management to set up a Rmb10bn Special Relief fund for quality POEs such as Zhongnan Construction to deal with near-term liquidity issues
Our view
An expected RRR cut at a below expected magnitude. Alongside States Council’s comment on Weds relating their intention to suitably utilities their monetary policy tool box to support the real economy, we believe the market has generally anticipated a RRR cut to be announced this weekend. Having said that, the magnitude of the RRR cut fell short of our and market expectations’ 50bps.
Set up of Special Relief Fund, if holds true, could offer decent help to liquidity stretched POE developers. If the rumour holds true, this would mark a notable step up in governments’ support towards troubled POE developers, as this will offer direct financing to liquidity stretched names and could potentially be a lifeboat for those that are still facing sizeable near-term repayment pressures particularly in the on and offshore bond market. Additionally, we believe other provincial governments may follow suit as well if this goes through without disagreements from the central government. Provincially-focused names such as Central China (832 HK) could be potential beneficiaries.
Monetary supports on their way. Despite a miss in terms of the magnitude of the RRR cut, the Special Relief Fund coordinated the Jiangsu government can potentially be a gamechanger if it holds true as it signifies a much more proactive stance that local governments are adopting to support liquidity stretched POE developers. This, coupled with newsflows relating local governments’ recent involvement on Evergrande (3333 HK)’s debt restructuring plan and request for Poly to accelerate the settlement of conversion land premiums to Times China (1233 HK), hints that regulator is evidently taking a more proactive approach over controlling credit risks within the China property sector. Alongside these developments and the anticipation of more positive newsflows ahead, we believe share prices may continue to rally in the near term. Having said that, we would need to see more signs of recovery in terms of refinancing (i.e. actual refinancing deals taking place by more developers; our offshore bond price index to head to >90 vs current level in the 50s) and in the physical market for this round of rebound to be sustainable. Besides safe plays of Longfor (960 HK), CR Land (1109 HK), COLI (688 HK), we also recommend COGO (81 HK) and Yuexiu (123 HK) among the mid-caps to ride on the rally.