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Ordinary Chinese investors are looking to stocks for a lift. If they're not careful, they may get the opposite.
Although the Shanghai Stock Exchange Composite Index is down more than 21 percent this year, Pan Weiting sees no better place to put her money. The 27-year-old Shanghai accountant recently shelved plans to buy an apartment after real estate prices reached record highs. The 2.25 percent interest she earns on the 400,000 yuan ($59,000) she has in her bank account is being nibbled away by rising inflation, which hit 2.8 percent in April.
If Pan were an American, she might switch to international stocks, gold, or municipal bonds. China's financial regulations, however, limit her investment choices to property or domestic equities. It's no contest. "The stock market is the best choice for the moment," says Pan. "Even the bank staff advised me against depositing more money."
Millions of other Chinese, who on average save half their income, share Pan's dilemma. Property prices are often out of their reach. If they do buy real estate, they risk seeing their investment wiped out should the government's recent curbs on mortgage loans finally chill the market. Inflation is forecast to climb 3.4 percent this year, according to the median estimate of 18 economists surveyed by Bloomberg on May 11. That will put more pressure on low-yielding savings accounts. "It becomes a question of who's the least ugly girl at the fair," says Victoria Mio, a Hong Kong-based senior fund manager at Robeco, whose firm manages $194 billion worldwide. "There is migration [to stocks] occurring, and the shift will accelerate with a few months of negative interest rates."
The softening of the real estate market could accelerate the trend. Citigroup (C) of New York and Paris-based BNP Paribas predict a 20 percent drop in home prices in 2010. That's because Chinese policymakers have increased bank reserve requirements three times in the past three months to slow lending. As much as $59 billion, about a third of the housing transaction volumes in China's 35 biggest cities in 2009, may be diverted from property to equities this year, according to CITIC Securities, China's biggest listed brokerage.
The Shanghai market, though, has already given up all of its gains of the last 12 months, and it may give up far more before the year is out, costing Chinese stock players plenty. BlackRock (BLK), the New York mutual fund group, is selling Chinese stocks in expectation that economic growth has peaked, while State Street Global Advisors of Boston has an "underweight" on Chinese equities, as the shares are pricier than those of smaller developing nations. Despite its steep drop, the Shanghai index trades at 15.6 times estimated earnings, compared with a multiple of 12 for the MSCI Emerging Markets Index.
Yet even affluent Chinese keep heading for stocks. Logistics company owner Hu Jielin has spent $1.3 million buying apartments in Shanghai, where average home prices have risen threefold in the past five years. Hu, 33, says he won't buy more property, given the government's recently imposed clampdown on mortgages. Instead, he plans to double his stock investments in the next six months, to $439,000. "Property prices are probably going to take a breather," says Hu. "Currently, stocks look the best bet."
The bottom line: If Chinese savers stampede into stocks, share prices could rise for a while. But if the economy slows, stocks could drop sharply.