Contagion fears spread as China property sector cash crunch intensifies

I suspect they're going to get their Lost Decades this time.

👤 The Sarcastic InvestorCommunity Lead :) 
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   Aug 15, 2023

China's largest private real estate developer Country Garden (2007.HK) is seeking to delay payment on a private onshore bond for the first time, the latest sign of a stifling cash crunch in the property sector, piling pressure on Beijing to step in.

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China is currently in a real estate crisis, and I don't see a way out for them this time. If I were to guess I would guess they have gone into a deflationary period and is about to get their Lost Decades. Thanks to Xi and his Covid-zero policy the Chinese people did nothing for 3 years, and now their youth unemployment rate is in the 20-30s and there's just no jobs for you. Also, Xi did a great job crushing private sector companies, and that includes real estate companies, for more control, and what you end up getting is sectors over sectors of inefficient companies either about to dry up in cash or going into bankruptcy, and that means job market is going to deteriorate further.

The real estate sales figured were hinting something bad earlier this year when the sales number drop 19% yoy in May and 28% yoy in June. And that's before the Country Garden news. Now, with all those Country Garden news we can expect the sales number to continue to trend lower in July and onwards. And that means the real estate sector companies including home improvement companies, agents, renovation companies... etc is going to suffer. Furthermore, in previous times, local governments would generate funds by selling land to real estate companies to raise money. However, since no one is buying properties at this time, local governments will not be able to do that, and that means a lot of cities would go bankruptcy one after another.

Imagine you have everyone in the country piling generations of wealth into the real estate that is dropping in value but you have no way to pay your mortgage back. And in reality is everyone in Chinese is doing it one way or another. The thing is the Chinese stock market is one of the worse performing stock market in the last decade, in order for your value to not shrink you need to find ways to achieve preservation of capital, and real estate became the primary tool for Chinese people to achieve that goal. And now, over 40% of people has over 2 properties, but that means leverage.

And we know what it means when you have leverage in a bear marker: it won't end well. You're borrowing against your future income to bet the price of the properties would go up. But you do not have future income anymore, and the price of the property continues to go down. But since properties are illiquid by default there's no other way to escape from this losing investment so for most people their best bet is to continue to pay their mortgage for a way out. This means the next 1-2 decades people would not be able to spend on anything extra and they are probably going to get their Lost Decades almost for sure.

Also, USDCNY just made multi-decade high. It's pretty obvious where the trend is going this time.

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p.s: Communism does not work, but I thought we already know. $MCHI

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Hi, I'm Shih-Min. I am a software engineer that deals with highly-scalable, distributed and fault-tolerant systems.