Have China’s Property Curbs Changed Investment Behavior?

From JP Morgan:

With residential property transaction volumes having tapered off and a series of cooling measures and purchase restrictions raising barriers to investment in China’s housing sector, an increasingly frequent question being asked is “what are China’s would-be property investors doing with their money?” This report examines this question and draws the following conclusions:

Property tightening measures should be supportive of a gradual investment rotation into the A-share market.

The “mass-affluent” segment of society has seen its investment options sharply affected by restrictive housing measures, since these households possess sufficient capital to purchase investment property, but do not have the same degree of access to investment vehicles such as private equity funds and retail property available to those in the highest echelons of wealth.With growth in household deposits moderating, the most obvious expectation is that funds should be channeled towards equity investments.Managed fund subscriptions have risen thus far in 2011 and the creation of new securities accounts has steadily picked up since mid-February (on a 5-week moving average basis: 393,912 accounts during the week ending Apr1, compared to 159,494 accounts during the week ending Feb 11); the proportion of active securities accounts has picked up from 11.3% in early-Feb to 33.7% in early-April – roughly midway in the range observed over thepast three years. Inexpensive valuations and relatively strong earningsgrowth should encourage greater asset allocation into the A-share market,especially if inflation concerns ease towards mid-year. Although the equityposition of domestic mutual funds is relatively elevated at ~80%, retailinvestors account for roughly 60% of the A-share market.

China’s gold demand has surged

Demand for physical gold and gold-related investments has been growing at a rapid pace as precious metals represent a good hedge against inflation. Chinese demand for gold jewelry increased 13.5% YoY in 2010, while demand for bars & coins rose 70.5%.Most market participants expect that China’s gold demand could grow at a still-stronger pace in 2011. Total consumer demand in 2010 was equivalent to a total value of RMB 150.8 billion, representing between 1.1-3.6% of the increase in household cash holdings during 2010 (depending on whether jewelry purchases are classified as investments).......read in full