Where Does China Go From Here? - TheStreet

Editors' pick: Originally published Sept. 23.

I was at a media lunch with Christopher Wood, CLSA's chief equity strategist, yesterday as part of their investor forum. Wood didn't get to eat much of his lunch because the controversial market commentator was talking the whole time. But I certainly enjoyed my barramundi fillet and coconut ice cream at the Grand Hyatt.

Wood has two favorite plays in Asia right now, both driven by domestic consumer spending: the Philippines (his No. 1 choice) and China.

Wood believes the biggest development on the horizon is if China can get its bonds included in the major bond indexes. This would force global investors to buy those bonds, which they have resisted since offshore China debt pays higher yields than the domestic market.

While onshore bonds are denominated in yuan, aka the renminbi or "people's currency," offshore bonds are in U.S. dollars. The yuan is currently losing ground to the U.S. dollar. But the currency shouldn't be a long-term problem, Wood suggests.

"The Chinese aren't going to be depreciating the renminbi forever," Wood said. Global fund managers would have to buy Chinese bonds, or at least think about buying them, with any index inclusion.

As an aside, he is bullish about Hong Kong stocks that are included in the Shanghai and Shenzhen "stock connects," which allow mainland investors to purchase Hong Kong stocks. "They've given Hong Kong a huge break with the southbound flows," Wood said. 

But China is not a unified nation. There's a divergence that is only increasing between successful cities and those that are struggling. And nowhere is that more clear than in the granular examination of property prices conducted by Real Estate Foresight. 

After looking at 220 neighborhoods in 23 major cities, Real Estate Foresight founder and CEO Robert Ciemniak can identify even the parts of a town that are likely to perform best. A top-down approach is not sufficient for investment in China anymore, he wisely advocates, so he goes street by street.

The neighborhood-scale analysis shows that different parts of a city may share more similarities with similar parts of other cities, rather than the rest of the city in which they find themselves. New high-speed rail lines, high-tech investment and major manufacturers are all good signals that this part of town will outperform.

Ciemniak's data coincides with the national figures showing that Shanghai, Beijing and Shenzhen are seeing the strongest price growth. Yet there is significant "performance mix" even in the "best" cities. Market conditions may mean that one part of a city is seeing strong volumes and prices, or strong volume but declining prices, trends that create vastly different results.

The strongest momentum, with strong sales and prices, comes in Hongkou, in Shanghai, Qinhuai in Nanjing, and Xinzhan in Hefei province. But Hongkou is a small part of Shanghai, making investment in real estate there hard.

The top price performers are Yantian, Bao'an and Longgang in Shenzhen, as well as Gusu and the Industrial Park Area in the city of Suzhou. Unlike last year, however, they demonstrate declines in sales volume. That indicates that prices are under pressure. 

Shenzhen, just across the border from me here in Hong Kong, has the highest per-capita wages in China. Not surprisingly then, its real estate has been the top performer in China, up 49% in the last year alone, according to the National Bureau of Statistics. Only the provincial cities of Xiamen (44%) and Hefei (140%) come even close.

There are also cities where developers appear to be cutting prices to generate sales, according to Real Estate Foresight. Qiaokou in Wuhan, Lishui in Nanjing, and Tianqiao in Jinan stand out, with developers apparently in "inventory clearing" mode. If a sustained spike in sales volume continues, prices will ultimately start to rise after the inventory is dispatched.

Why is any of this important? Well, developers can make the most of the information to target high-volume, high-price districts in which to ramp up gross floor area (GFA). Buyers can feel secure purchasing flats or houses in similar places. And, most of all for readers of Real Money, investors can benefit by targeting developers that have portfolios that are concentrated in that part of town. I ran through Chinese property developers earlier this week to generate some investment ideas. 

"New home sales prices and GFA volumes determine revenues for developers, and prices alone are a performance indicator for the end-buyer," Ciemniak told me. 

Ciemniak says that the most surprising aspect of the data is that the range of performance on both price- and volume-growth has widened compared with last year. This divergence gives the real picture of what's going on in China, where I have said before there are at least two economies at work, the flourishing east coast and struggling agricultural provinces in central and western China.

Editor's Note: This article was originally published at 10 a.m. EDT on Real Money on Sept. 23.