Soho China, Shimao, R&F and 8 other Chinese developers may be ineligible for mainland cash

A clutch of Hong Kong-listed Chinese property developers risk losing the backing of mainland investors, as their market values fall below the threshold limit for inclusion in the Stock Connect programme.

The cross-border investment scheme gives mainland investors access to a large pool of stocks traded in Hong Kong, while overseas investors are able to buy yuan-traded shares on the mainland's exchanges.

Soho China, Shimao Group Holdings, Guangzhou R&F Properties and eight other companies on the Hang Seng Composite SmallCap Index have seen their market capitalisation fall below the HK$4 billion (US$512.2 million) floor that qualifies them for the scheme. That would be a further hit to these developers that are already plagued by liquidity stress and growing calls for winding-up by unpaid creditors.

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Based on the rules set by the Shanghai and Shenzhen bourses, any stock on the small-cap gauge will be kicked out of the cross-border investment scheme, should their average month-end market value fall below the HK$4 billion mark for 12 consecutive months preceding the review date.

The expulsions may take place as early as August, when the mainland's exchanges are set to verify the eligibility for the mutual access scheme following the quarterly index rebalancing by compiler Hang Seng Indexes.

Mainland Chinese property stocks listed in Hong Kong will be dealt a blow if they are made ineligible for purchase by mainland investors, as onshore investors were the main drivers of a recent rebound. The Hang Seng Mainland Properties Index had rebounded by as much as 40 per cent within a month through May 20, after Beijing introduced a broad package to bail out the industry last month. Now, most of those gains have been erased.

"Typically, mainland funds dominate the trading in these smaller property stocks in Hong Kong and without such support, these stocks could very probably fall even lower," said Wu Kan, an investment manager at Soochow Securities in Shanghai. "Overseas investors have no appetite for these small-caps. The property market is still in a downturn and the time could be longer than expected."

Among the 23 property developers on the Hang Seng small-cap gauge, almost half face the risk of getting booted from the Stock Connect.

The sizes of the companies under risk straddle a broad spectrum, ranging from CIFI Holdings Group, which has a market capitalisation of HK$3.6 billion, to Cosmopolitan International Holdings, valued at HK$495 million. The list includes Shimao, which is capitalised at HK$2.89 billion and Guangzhou R&F, which is valued at 3.5 billion. Sino-Ocean Group Holdings, valued at HK$3.1 billion, is also among those at risk.

The property market is on shaky ground in contrast with a month ago, when hopes were high for a turnaround in the sector after China lowered the down payment ratio to a record low and cut mortgage rates nationwide in what has been seen as the most forceful rescue measures to shore up the industry so far. But confidence plunged after home prices fell at the fastest pace in nearly a decade in May.

A slew of winding-up petitions filed by creditors against Chinese developers have also weighed on sentiment. Shimao was given a four-week reprieve by a Hong Kong court on Wednesday, giving it more time to secure lenders' approval for its debt restructuring proposal, as a growing number of creditor-led liquidation petitions put pressure on the sector. Country Garden Holdings, once China's biggest developer by sales, is also facing a liquidation hearing next month, while Dexin, a medium-sized developer in the east Zhejiang province was ordered by a Hong Kong court to be liquidated this month.

"The policy effect of stimulating demand is limited," said Zhao Xuxiang, an analyst at Orient Securities. "Whether the property market can sustain a recovery depends on expectations of residents' incomes and their expectations of home prices."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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