Property dumped after China move

China's best-performing stock funds are turning bearish on housing shares after a run-up in real estate that investor Mark Mobius says is far from over.

Shanghai Elegant Investment's Shi Bo and Chris Ruffle, China co-chairman of Martin Currie, say they may sell property-related shares as the Government clamps down on lending to prevent the economy overheating.

They are buying retailers, health-care companies and medical equipment makers.

"Property prices are already very high so there's limited room for further growth," Shi said.

"We won't see a return to the growth model of yesteryear. The next phase will be a transformative one, led by a shift from manufacturing to consumption."

China's central bank last week curbed lending by increasing the proportion of deposits banks must set aside as reserves.

Property prices in 70 major Chinese cities rose at the fastest pace in 18 months in December and new bank loans reached a record $1.3 trillion in the first 11 months of last year.

Mobius, of Templeton Asset Management, was buying shares of developers because consumer demand would increase and government efforts would not hurt economic growth.

"The Chinese will act rationally and they're not going to kill the market," he said. "There's still a lot of savings in China. Prices are high but I don't see a crash."

He says he's maintaining his position after the central bank's actions.

The People's Bank of China raised the reserve requirement by 50 basis points, or 0.5 percentage point, signalling its intention to increase borrowing costs earlier than economists' predictions in a Bloomberg survey last week.

The central bank last raised interest rates in December 2007.

While Mobius is a "very successful investor", the bet on real estate "all depends on government policy", said Ruffle, whose Edinburgh-based company manages $19 billion.

"The Government is keen to restrain the property boom."

The 33-company Shanghai Composite Index's property measure rose 103 per cent last year, pushing up the average price-to-earnings ratio to 29 times reported earnings, compared with 14.2 at the beginning of 2009.

The index has fallen 9.1 per cent over the past month.

Property is now the second-worst performing industry in the Shanghai Composite this year and Premier Wen Jiabao said the Government would use taxes and interest rates to "stabilise" the market.

Morgan Stanley's China strategist Jerry Lou said that a property tax might be introduced this year, predicting an end to the rally for real estate stocks.

Ruffle, 52, said he's selling some developers, banks, airlines and internet company NetEase Inc.

Shi plans to avoid property stocks after home values increased.

Shi is bullish on the prospects for consumer and health-care stocks even if interest rates rise, saying the companies will benefit most as the Government increases domestic spending to diversify the economy away from exports.

Credit Suisse says China's share of global consumption will jump more than fourfold to 23.1 per cent in 2020, from 5.2 per cent last year, and overtake the US as the world's largest consumer market.

"Consumer names will continue to be a market focus," said Lilian Co, chief investment officer at Hong Kong-based LBN Advisers Ltd.

"We expect more government policies to boost domestic spending and possibly tax cuts.

"Consumers in the richer coastal provinces are likely to spend on seeking a healthier lifestyle," said Shi, whose funds gained 110 per cent in the past year.

Hong Kong-based fund manager Clive Zhang said real estate stocks carry risk while higher interest rates might have a marginal effect on retail spending because increases won't be steep enough to deter purchases.