“The residential property market continued to recover in recent months, with new home sales up 18% on a square meter basis last month, compared to a decline of 4% during June of 2014,” he said. “Last month was the second consecutive month of double-digit growth in new home sales, the first time that has happened since late 2013. And financing rules remain strict, with buyers required to put down cash equal to at least 30% of the purchase price.”
Something else to consider when weighing up whether to invest in Chinese shares is that according to some, the recent slide was self-inflicted.
“After rallying around 150% since the middle of 2014, mainland China’s ‘A Share’ market has corrected almost 35% since mid-June,” said Douglas Turnbull, head of Chinese equities at Neptune. “There were two main triggers for this pullback. First, the Chinese market regulator cracked down on the amount of leverage used to make stock purchases – known as margin finance – which had reached a dangerously high level.”
“Secondly, issuance, both IPOs and equity placements, had increased substantially through the early summer, absorbing a great deal of market liquidity,” Turnball continued. “Once the selling started, a vicious cycle commenced whereby leveraged shareholders were forced to sell shares to meet margin calls as the value of their holdings fell, which in turn depressed market values further thus leading to more margin calls. Also, after the sharp rally, valuations were extremely high and therefore provided no support,” he added.
Logic would dictate that if you accept this as true, then the drop in share prices was not related to the underlying health of Chinese companies or its economy, and they can recover.
