Vidya Ranganathan and Samuel Shen

SHANGHAI, (Reuters) – Chinese investors have abandoned an old attachment to property investments products in favor of seeking returns on equities. This is despite authorities being strict about the property sector that has been fueled by debt.

As the debt problems of China Evergrande Group, a struggling property company, has made it difficult to get cash out of property investments products that trust companies have issued since September.

This is a way to close one of the last funding sources for property developers, who already face strict lending restrictions onshore and high borrowing costs in offshore bonds markets.

Desmond Pan of Shanghai said, “Previous investment logic collapsed”. He is now considering moving millions in property trust products to Bridgewater’s China fund called All Weather Enhanced Strategy.

Pan, looking through the Brochure with Ray Dalio as founder and smiling face, believes this multi-asset investment fund with a 19% annualized return is an acceptable alternative to investing.

Chinese investors have always been interested in real estate investments. But, money flowing to property investments has been decreasing since Beijing introduced shadow banking. Evergrande’s September default on wealth management product (WMPs), which caused investor protests across many cities, only increased that trend.

The sum of trust money invested in real property was 2.1 trillion yuan ($329.3billion) at the end June. This is 17% less than a year ago. According to China Trustee Association, however, trust funds that invest in stocks and bonds jumped 35%, to 2.8 trillion Yuan.

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The rotation of money picked up pace in recent months, with fundraising by property-related trust products slumping 38% in September from the previous month, and 55% in October, according to Use Finance & Trust Research Institute.

A FoF manager from Shenwan Hongyuan Group said that property-related trust products have stopped selling and that clients are shifting their money into more stable funds such as Quant Funds and FoF. The FoF manager declined to comment as he was not permitted to address the media.

Quant funds or quant funds use software to automate investment decisions. These funds often produce higher returns than bonds and have less risk than stock investments.

Jason Hsu (founder and chairman, Rayliant Global Advisors), said that Chinese policies have been reducing capital from real estate. This is a positive sign for asset managers. Rayliant Global Advisors recently launched a Chinese hedge fund using quantitative analysis.

Shi Ke, a Shanghai iFund Asset Management Co Partner, a quant-hedge fund house agrees with the statement: “You must be careful when investing in property products. “The risk of default increasing.”

Citi Securities claims that China’s quant private funds have increased to 1 trillion yuan ($154.6 million) over the past months. They are almost 10x their 2017 size.

Not only trust products but also real estate wealth products were affected by Evergrande’s defaults and the liquidity crunch of Kaisa Group.

Jianda Ni is the chairman of Jupai Holdings, a wealth management firm that focuses on real estate. She says there’s been an irreversible shift in investment towards equities and sectors like technology and new energie, as well as away from developers’ debt.

The firm, which distributes products to fund projects by Yango Group Co, Kaisa and Guangzhou R&F Properties Co, said it continues to diversify its product line and introduce more equity, overseas and secondary market products.

Rival Hywin Holdings Ltd distributes products for developers such as Evergrande. In September, it told Reuters that it aimed at reducing its dependence on real estate and expanding new products. The company did not reply to requests for further information.

Liang Dongqing (head of wealth management at China International Capital Corp) stated that although real estate is still the largest component of Chinese households’ balance sheets, demographics and liquidity drivers driving China’s property bull market have disappeared.

Wealth managers have the greatest opportunity to help clients shift their wealth from real estate and to reallocate assets in order to benefit from China’s economic growth.

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