It has been only a few days since we reported on the debt default by China’s largest property developer, Country Garden; there are rumors that the Chinese government is planning on creating a “stabilization fund” to help its struggling stock market. The China Securities and Regulatory Commission submitted a plan to the country’s leadership that would create a state-backed stabilization fund of tens of billions of dollars to help struggling companies.
While there are no details of what the funds will actually do, we can look to recent moves by China’s state-controlled central bank, Central Huijin Investment, for an idea of their strategy. This week, Central Huijin Investments increased its holding in all of China’s “Big Four” banks, effectively reversing a months-long decline in their stock prices. If China does use this money to help stocks, then they will certainly use some of it for their massive real estate companies. But, this approach is really only a stop-gap measure and can backfire.
If stocks continue to decline after their capital injections, the central bank will be sitting on losses and have proved ineffective, making it harder for future interventions. There might also be better ways to prevent real estate losses from creating turmoil in their financial system. China Resources, a giant Chinese conglomerate once worth over $200 billion, is considering spinning off its property arm in an IPO to help it distance itself from the decline in value of its real estate assets.
Sometimes, I worry that we focus too much on what is happening in China since most of our readers probably don’t have any business there. But then I remember that the sheer size of China’s real estate sector is enough to make it important on a global scale. At its peak in 2018, Country Garden had a market cap of around $30 billion. That made it larger than some of the largest Western real estate owners like AvalonBay and Equity Residential. Now, it is worth less than $3 billion (or $0 if it can not find a way to stay solvent). That precipice value decline is sure to affect more than just its shareholders (including large institutions like Allianz and USB). In fact, the IMF just released a warning that a real estate crisis in China would actually affect the entire Asia Pacific region: “A more protracted real estate crisis and limited policy response in China would deepen the regional slowdown.” The property industry all over the world is dealing with the higher interest rate environment, but nowhere are the stakes higher for all of us than in China.