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China’s home prices growth fastest in 5 months, raises policy challenge

BEIJING: New home prices in China rose at their fastest pace in five months in May, complicating government efforts to keep frothy housing markets under control as it rolls out more stimulus for the slowing economy.

Average new home prices in China’s 70 major cities rose 0.7% in May from the previous month, picking up from a 0.6% rise in April and the quickest pace since December, according to Reuters calculations based on National Bureau of Statistics (NBS) data on Tuesday.

That marked the 49th straight month of price gains. Sixty-seven of the total 70 cities surveyed by the NBS reported higher prices in May, the same as April.

On an annual basis, home prices increased 10.7% in May, unchanged from April’s growth rate.

Beijing has repeatedly urged local governments to keep runaway prices under control, but a recent easing in credit conditions, pent-up demand for housing, and an implicit government mandate to prevent a collapse have kept the market surprisingly resilient.

But further curbs on home buyers would risk adding to pressure on China’s economy, which has seen sales slowing due to weaker domestic demand and an escalating trade war with the United States.

Data last week showed the biggest drop in property sales in nearly two years in May, and markedly slower growth in investment and new construction starts, pointing to further economic weakness ahead and more government growth boosting measures.

“If the market becomes overheated policymakers will definitely rush to regulate it,” Zhang Dawei, a Beijing-based analyst of property consultancy Centaline, wrote in a note.

Top Chinese officials including Guo Shuqing, chairman of China’s banking regulator, have warned in recent weeks that Beijing must remain vigilant about property bubble risks.

“History has proven that countries and regions that are overly-reliant on real estate for economic development will ultimately have to pay a heavy price,” Guo told a forum in Shanghai last week.

Some developers have sought to promote sales by cutting prices, which has raised alarm. The Chinese city of Enshi tried to stabilise house prices by urging developers to halt drastic price cuts, threatening punishing measures unless such “wrong behaviours” stopped.

RISKS OF POLICY EASING

China’s home price growth has slowed significantly since the second half of 2017 due to intensive local curbs on speculative investments.

But the trends have been uneven across the country, with recent signs of resurgent price pressures. Some smaller cities with rising inventories have quietly loosened restrictions on home buyers to prop up consumer confidence and demand.

Mortgage rates have also been coming down in some areas in response to regulators’ calls on banks to ramp up lending to support the economy.

The average interest rate on first home loans continued to drop in May to the lowest level since 2018, according to a market report cited by state-backed Economic Information Daily.

New household loans – mainly mortgages – still remained elevated, totalling 662.5 billion yuan ($95.70 billion) in May, and accounting for 56.14% of total new loans last month.

Higher prices were mainly driven by the smaller tier-3 cities, up 0.8% on a monthly basis compared with a 0.5% gain in April, the statistics bureau said in a note accompanying the data.

Prices in China’s four top-tier cities – Beijing, Shanghai, Guangzhou and Shenzhen – saw slower growth in May, increasing 0.3% versus 0.6% growth in the previous month.

Tier-2 cities, which include most of larger provincial capitals, grew 0.6%, unchanged from the rate a month earlier.

Xian, the capital of Shaanxi Province in western China with a population of over 7 million, became the top market performer in May, with prices surging 2% on-month.

Centaline’s Zhang estimates various Chinese government entities announced 41 tightening measures at the city level in May.

“It is still a whack-a-mole game and the intensity of policy tightening so far has not exceeded market expectations,”

“But to a certain extent, these policies will alleviate some upward pressure on the prices.”



YTL’s share swap offer a positive deal

PETALING JAYA: MIDF Research views YTL Corp Bhd’s proposal to take YTL Land & Development Bhd private via share swap as positive deal for the group, citing potential value accretion and small dilutive impact.

The research house sees the deal as a positive for YTL Corp as its shares are currently trading at over 100% premium to YTL Land’s price-to-book (PB) valuation of 0.39 times, giving rise to potential value accretion.

“While we are still largely uncertain on YTL Land’s minorities’ reception on the share swap offer (given the large disparity in valuations), despite the dilutive impact, this is potentially a net valuation accretive deal for YTL,” it said in a note.

Although YTL Land currently entails net gearing of 2.6 times compared with 2.2 times for YTL Corp, its net debt is just 5.4% of YTL’s group net debt level.

MIDF noted that YTL’s offer price of 36 sen per share (RM104 million) for the remaining 35% YTL shares is at par to its latest closing price. YTL Land’s irredeemable convertible unsecured loan stock (ICULS) will be offered at a market price of 32 sen per share totaling RM67 million.

“YTL Land is currently loss making and the offer represents a PB valuation of just 0.39 times. For the share swap, YTL’s shares will be valued at RM1.14 (at par to market price), which implies an estimated 0.8 times PBV.”

MIDF said if the offer is fully taken up, it will expand the group’s share base by 150 million new shares equivalent to 1.5% of its share, with the acquisition of YTL Land share accounting for 0.9% and the acquisition of ICULS making up 0.6%.

“However, since YTL Land is loss making, consolidation of the remaining 35% of YTL Land’s losses is estimated to impact YTL’s FY20 net profit by 6% (from an incremental RM26 million net loss).”

MIDF retains its neutral call on YTL Corp with an unchanged target price of RM1.03.


YTL Corp proposes to take YTL Land private via share exchange

PETALING JAYA: YTL Corp Bhd proposes to privatise YTL Land & Development Bhd through a share exchange offer.

YTL Corp told Bursa Malaysia that the share exchange offer entails the proposed acquisition by YTL Corp of YTL Land shares at 36 sen per share and YTL Land irredeemable convertible unsecured loan stock (ICULS) at 32 sen per ICULS.

The proposed offer will be satisfied through the issuance of new shares in YTL Corp at an issue price of RM1.14 each. With that, it will translate to an exchange ratio of about 0.32 YTL Corp share for each YTL Land share and 0.28 YTL Corp share for each YTL Land ICULS.

The proposed offer is not conditional upon any minimum level of acceptances of the offer shares as YTL already holds more than 50% of the voting shares of YTL Land.

As at June 7, 2019, YTL Corp owns a 65.26% stake in YTL Land (excluding treasury shares) as well as 78.95% of the total outstanding YTL Land ICULS.

Based on the exchange ratios, the shares offer price and ICULS offer price represent discounts of 5.4% and 9.1% over one-month volume weighted average prices of YTL Land shares and ICULS.

YTL Land’s share price closed 1 sen or 2.7% lower at 36 sen today, while YTL Corp gained 1 sen or 0.9% to RM1.14.

Based on the 288.05 million offer shares and 208.78 million offer ICULS, YTL Corp may issue up to 149.57 million consideration shares assuming all the holders accept the offer.

YTL Corp said YTL Land shareholders who exchange their offer securities for YTL Corp shares are expected to benefit from YTL Corp’s position as one of the top 50 largest stocks listed on Bursa Securities.

“The proposed offer provides an opportunity for the holders to reduce their exposure to a single industry business (i.e. property development) that has plateaued in terms of growth and development opportunities in recent years, and the outlook for which is soft for the near to medium term, in exchange for an investment in the more diversified range of businesses and earnings profile of the YTL Corp.”

Currently, both YTL Corp and YTL Land are required to comply with the regulatory requirements as well as listing obligations prescribed by Bursa Securities for listed issuers, representing an overlap of administrative efforts and costs.

However, YTL Corp said the delisting of YTL Land will eliminate such overlap, dispense with expenses to maintain the listing status of YTL Land and allow YTL Land to rechannel its resources towards its core business instead.

YTL Land was listed on Oct 7, 1973.

The offer will remain open for acceptances for at least 21 days from the posting date.


RAM ratings: Banks expect slower loan growth

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Chinese vice-premier urges more support for economy as trade war bites

SHANGHAI, June 13 — Chinese regulators should step up support for the economy and keep ample liquidity in the financial system, Vice-Premier Liu He said today, suggesting Beijing would soon unveil more policies to bolster growth amid rising US…


China’s Vice Premier Liu calls for more measures to support economy

SHANGHAI: Chinese regulators should step up support for the economy and keep ample liquidity in the financial system, Vice Premier Liu He said on Thursday, suggesting Beijing would soon unveil more policies to bolster growth amid rising U.S. trade pressure.

Beijing has plenty of policy tools and is capable of dealing with various challenges, Liu said at a financial forum in Shanghai.

Despite a slew of support measures and policy easing since last year, China’s cooling economy is still struggling to get back on firm footing, and last month’s sudden escalation in U.S.-Sino tensions has raised fears of a full-blown trade war that could trigger a global recession.

Liu’s comments came a day after data showed China’s credit growth was weaker than expected in May, reinforcing market expectations that more monetary easing is needed. Factory activity contracted in May and imports fell the most in nearly three years, highlighting soft demand.

“At present, we do have some external pressures, but those external pressures will help us boost our self-reliance in innovation and accelerate the pace of high-speed development,” said Liu, who is also the lead negotiator in the U.S.-China trade talks.

The government will roll out more strong measures to promote reforms and opening up, added Liu.

People’s Bank of China chief Yi Gang said last week that there was “tremendous” room to make policy adjustments if the trade war worsens.

Earlier on Thursday, China Daily, citing economists, said China is expected to adjust money and credit supply in coming weeks, including cuts to interest rates or reserve ratio requirements, to counter “downside risks” if trade tensions escalate.

Further cuts in banks’ reserve requirement ratios (RRR) were already expected this year, especially after the trade conflict escalated last month. Both sides hiked tariffs on each other’s goods, and Washington is threatening more.

Last month, the PBOC stepped up efforts to increase loan growth and business activity, announcing a three-phase cut in regional banks’ reserve requirements to reduce financing costs for small and private companies.

It has now cut RRR times six since early 2018, and has also guided short-term interest rates lower.

Unlike previous downturns, however, the central bank has been reluctant to cut benchmark interest rates so far. Analysts believe it has held off on more aggressive measures due to concerns that such a move could risk adding a mountain of debt leftover from past stimulus sprees.

Sources told Reuters in February that the PBOC considered a benchmark rate cut a last resort. But some analysts now think one or more cuts are likely if the trade dispute spirals out of control and the U.S. Federal Reserve starts cutting its rates, giving the PBOC more room to manoeuvre.

Some analysts believe the chances of a trade deal are receding, with both sides showing signs of digging in. But U.S. President Donald Trump has said he plans to meet his Chinese counterpart Xi Jinping at a G20 summit later this month.

CURRENCY RISKS

More forceful easing could also trigger capital outflows and add pressure on the Chinese yuan.

The yuan has fallen nearly 3 percent since the trade flare-up last month and is nearing the closely watched 7 per dollar mark, a level last seen during the global financial crisis a decade ago.

“China is capable and confident of maintaining stable operation of the foreign exchange market and keep the yuan basically stable at reasonable and balanced levels,” Pan Gongsheng, head of the State Administration of Foreign Exchange, said at the forum.

Citing experts, China Daily said financial institutions were facing tighter liquidity in June, and said authorities want to spur faster credit growth to meet economic growth targets.

Beijing has set a growth target of around 6% to 6.5% for this year, easing from 6.6% in 2018, which was the slowest rate of expansion the country has seen in nearly 30 years.

Analysts at Bank of America Merrill Lynch believe China’s GDP growth could fall to 5.8% this year and 5.6% in 2020 if the trade war intensifies, and expects Beijing to respond with four benchmark rate cuts, more RRR cuts, consumption subsidies and measures to stabilise employment.

On Monday, the government announced steps to give local governments more financing flexibility so they can increase infrastructure spending, a key part of the stimulus plan that has not revived investment as quickly as some China watchers had expected.

The escalating trade war has gone beyond tariffs as the two countries increase pressure on each other to cede ground.

Chinese state media has warned that Beijing could use rare earths for its next strike. The United States relies on China for supplies of the rare earths to make a host of high-tech products.

China is also the biggest holder of U.S. government debt, with about $1.12 trillion in U.S. Treasuries, stirring talk that Beijing could start dumping U.S. bonds.

China is a responsible investor in global financial markets, Pan said. – Reuters


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