China Property Stocks Tumble as Investors Reassess Risk Following Record Rally

Shares of Chinese property developers plummeted after a record-breaking surge, triggering a wider market retreat as investors took a step back to reassess the sector’s risk exposure. A Bloomberg Intelligence index tracking Chinese property companies dropped by as much as 16% on Thursday, halting a five-session winning streak, which had included a remarkable 47% rise just the day before. Major developers like Shimao Group Holdings Ltd. and Sunac China Holdings Ltd. were among the hardest hit.

The pullback comes as China’s broader stock market rally, which had gained more than 30% from a September low, began to lose momentum. The rally had been largely driven by optimism over policy easing measures aimed at stabilizing the property market and boosting liquidity. However, investor sentiment began to sour as the valuation risks became more apparent. JPMorgan Chase & Co. warned that chasing the sentiment-driven rally at these elevated valuations could carry significant risks.

JPMorgan’s analysts, led by Karl Chan, noted that while Chinese authorities have demonstrated a willingness to support the struggling property sector, the scale of the policy interventions might not be as robust as some investors had anticipated. “If the incoming data or further policy actions fail to meet market expectations, the correction could be steep,” the analysts wrote in a note on Wednesday.

Investor optimism had been bolstered last week when Beijing introduced fresh stimulus measures, including interest rate cuts, increased liquidity for banks, and targeted support for the stock market. Four major cities also eased restrictions on home purchases, and the central bank lowered mortgage rates, all in an effort to reinvigorate the sluggish housing market after a prolonged downturn in home sales in September.

Despite the recent rebound, JPMorgan analysts suggested that the rally in Chinese property stocks is likely to run out of steam by mid- to late October. They also highlighted the difficulty in estimating the upside potential in a rally driven largely by sentiment, rather than fundamentals. Instead of chasing developer stocks, the bank recommends focusing on property management companies like China Resources Mixc Lifestyle Services Ltd. and Poly Property Services Co., which offer stronger fundamentals and more reasonable valuations.

Analysis:

For investors, the recent boom and subsequent retreat in China’s property stocks underscores the risks of sentiment-driven rallies, especially in sectors with significant structural challenges. The Chinese real estate market has been grappling with issues like oversupply, declining home sales, and high debt levels for several years. Despite policy easing efforts, the fundamental challenges facing the sector remain daunting.

While some short-term traders may have profited from the recent surge, long-term investors need to weigh the ongoing risks. The rally provided an opportunity to capitalize on market optimism, but those who stayed too long might now be facing losses as reality sets in. With valuations still elevated and the policy response potentially falling short of what’s needed, further downside risk remains.

For more risk-averse investors, focusing on property management firms with stable business models and healthier balance sheets may present a safer bet. These companies are less exposed to the speculative volatility of the real estate development sector and are positioned to benefit from ongoing demand for housing services.