China investment: Focus on P2P - Part 1

Internet finance is developing very fast. There are many different models. P2P internet loans is one of such models. While boosting financial creativity, it also introduces new risks.

P2P internet loan is to use internet as a media, to realize an online platform for dedicated network to provide loans via internet. Target audience are SMEs and individuals who are not covered under traditional financial services. It’s an enhancement to the traditional financial system. Currently, there are more than 1300 P2P such online loan companies. Business model is differentiating. Some only provide the platform but do not get involved with deal. For e.g. Yi Long Wang, Pai Pai Dai, Dian Rong Wang etc. These have smaller risks. On the other hand, some built up cash resources to provide cash loans and even interest guarantee. This is the current P2P mainstream model. For e.g. Xuan Xin, Ren Ren Dai. They entered the money transaction area. On top pf that, companies like Lu Jin Suo and You Li Wang converted loans into asset securities before selling them on the internet.

In recent years, P2P developed very quickly due to low barriers of entry, strong liquidity, convenient procedures etc. traditional financial institutions have higher CAPEX and barriers of entry. Internet uses a formless network as medium to reduce CAPEX and enhance efficiency to satisfy the needs of investors. This also provides a crucial helping hand to SMEs who badly need support but do not get it. Traditional banks have obvious preference for bigger companies. SMEs had to resort to small loans from finance companies charging sky high interest, causing SMEs to resort to loan sharks for help. With the new P2P platform, SMEs can settle their financial difficulties much more quickly and safely.

John Wong PhD, CA

China Investment: Time to sell shares to buy properties?

China property prices seems to be warming up again. Shenzhen led the rise in the entire China recently. Previously, many China residents sold properties to buy stocks. Today, it’s the reverse: selling stocks to buy property. Many property developers, even though acknowledging that the golden age has past, now coined a new term of “white silver era”.

During my previous talks, from the end of 2014, I mentioned China property has entered a new norm phase. As long as residential properties fulfil 4 conditions, in the long term, it will perform better than inflation by at least a percentage. At least, such properties’ value will be preserved.

These four conditions are: (1) local characteristic; (2) near to school zone; (3) near to MTR stations; (4) houses of necessities. Today, Shenzhen and Shanghai’s property appreciation coincide with either one or a few of these four conditions.

Let’s look at Shenzhen. This May’s price grew 1.67% compared to April. However, not every property rose. Guangming New District fell. On the other hand, Da Peng District rose due to local characteristic (condition 1) – where it was declared a test point for eco development.

Shanghai also rose by 1% because it fulfilled the third condition of being near to MTR stations. This was very obvious. Line 14 MTR was built end of last year. All districts along the MTR line rose. This proves that property price has reached a turning point, entering a new norm. It is a steady investment in the long term. Henceforth, property price will unlikely spike aggressively like in the past. Instead it will likely become a stable investment.

Some statistics.

Let’s look at property pricing trend. All 1^st (which include Beijing, Shanghai, Guangzhou, Shenzhen), 2^nd and 3^rd tier (which include Dongguan, Zhongshan, Huizhou) cities went through roughly the same cycle. The highest point was in July 2014. Then the price started falling. This year, the fall was stopped and is now stable.

1st tier cities Shanghai and Shenzhen’s May pricing rose from April this year. Beijing and Guangzhou is still lower than April but the difference is nearing to zero. Beijing was lower than April by only 0.5% while Guangzhou was only 0.1% lower than April. Year to year’s fall for the same period was bigger in magnitude though. Beijing fell by 5%, Shanghai 2%, Guangzhou 9%, and Shenzhen 10%. 2^nd tier cities went through the same cycle, this year being at water level of stability except for Hangzhou which continued to drop.

Average pricing value:

1^st tier cities: From the highest point last year to 2015’s May, 1^st tier property average values dropped by 7.2%.

2^nd tier cities: From the highest point last year to 2015’s May, 1^st tier property average values dropped by 16.5%.

3^rd tier cities: From the highest point last year to 2015’s May, 1^st tier property average values dropped by 21%.

Hence, 1^st tier cities dropped by the least while 3^rd tier cities the most. This is very normal. It’s price mechanism. If prices rose too fast previously, it will correct. It will then stabilize after correction, which is what is happening now.

Let’s look at transaction volume.

All the three tier cities went through the same cycle. From 2014’s Jan to this 2015’s May, the lowest volume period was 2015’s Chinese New Year (CNY) period in Feb. Volume recovered after CNY.

Accumulated volume from Jan to May this year, compared to the same period last year: 1^st tier cities rose 43%; 2^nd tier cities rose 18.6%; 3^rd tier cities rose 46%.

Earlier this year, many China reports claimed that property prices fell drastically due to oversupply. I disagreed. Property supply in reserves will not affect normalized property prices.

To prove my point, let’s look at property supply reserves statistics for China. Price started to drop since mid-year of 2014. However, supply reserves reached the highest point beginning of this year. It rose 1.38 times compared to Jan 2014. This proves that property price fell way before reserves starting to reduce. In May, reserves dropped by 6.4%. Why? Price fell first, then property market recovered to its norm. The reserves were then slowly digested. Hence, reserves falling is an important step of property market resuming to its norm. At this point, due to price adjustment, it provided a warning to property developers. They can’t be aggressively developing properties anymore. They have to focus on high quality instead. Hence, we find that after price adjustment, property developers’ investment speed also fell drastically. In April 2015, investment growth was only 6%. Previously it has always been more than 20% growth rate.

I hope that property and stock market can form 2 entirely different investment target. Stock market will remain high risk high return. Property market should be like other developed countries where they remain a stable investment. Forget about property prices rising aggressively in future, but that it could preserve value in the long term. Rightfully, supply reserves will not affect price, but that instead, price will affect reserves.

May China property market become more holistic and healthy.

John Wong PhD, CA