By Hanny Wan – Jul 8, 2010
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Legg Mason Inc.’s Hong Kong investment unit is looking “closely” at buying more shares of Chinese developers as the risk of further measures to curb real- estate prices eases.

Legg Mason may further increase its holdings of developers to “overweight” over the next one or two months, said Crystal Chan, head of Hong Kong and China investments at Legg Mason Hong Kong, an affiliate of Legg Mason Inc., which oversees $658 billion. Her fund currently has a “neutral” rating on developers.

“From here on there isn’t a big risk of aggressive tightening,” Chan said at a media briefing in Hong Kong today. “If property prices witness some 15 percent to 20 percent drop, that should give a signal of the market bottoming.”

China intensified a crackdown on real estate speculation after announcing the economy expanded at an 11.9 percent annual pace in the first quarter, the most since 2007. Measures have included raising the minimum rates of interest payable on mortgages and increasing down payment ratios for some home purchases.

The efforts have contributed to a decline in real-estate sales, while prices continue to climb. The value of property sales dropped 25 percent in May from the previous month. The increase in prices, at an annual 12.4 percent in May according to a government survey of 70 cities, was down from a 12.8 percent advance in April.

“The physical property market has reflected government policies, and stocks have already reflected the bad news,” Chan said.

‘May Cut Banks’

Concerns over banks’ fundraising plans brought the shares’ valuations to “attractive” levels at the beginning of the year, which prompted Legg Mason to increase its holdings in banking stocks, Chan said.

“We may cut our holdings in banking stocks on a relative basis” while raising holdings in developers, Chan said.

Legg Mason Hong Kong Equities Fund has dropped 8.3 percent this year through yesterday, less than the 9.2 percent decline in the city’s benchmark Hang Seng Index.

In addition to Agricultural Bank of China Ltd.’s initial public offering, which may become the world’s largest, its four biggest rivals — Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd., and Bank of Communications Co. — have announced plans to raise as much as $34.4 billion by selling bonds and shares. The lenders are seeking to restore capital eroded by record lending and comply with stricter rules governing financial strength.

Even though Legg Mason did subscribe to Agricultural Bank’s IPO, the fund manager is “very price-disciplined” and most likely wasn’t allocated any shares, Chan said.

Agricultural Bank, China’s No. 1 lender by customers, priced its Hong Kong shares at HK$3.20 apiece this week after the stock was offered for between HK$2.88 and HK$3.48, said two people with knowledge of the pricing.

“Growth comes at a price,” Chan said. “There are plenty of other choices available.”

To contact the reporter on this story: Hanny Wan in Hong Kong at