In all countries, the politicians either directly or indirectly encourages businesses to expand their businesses and when it works everyone is happy and looking forward to the future. However in the economy cycles happen, things beyond control happen and then what does the government do?
In an article from China, the government has encouraged the major developers to build hundreds of thousands of apartment buildings across China. In some cases, there are ghosts cities where developers built but hardly anyone lives there, one wonders about the cash flow deficits. The question is how do the private property developers who were essentially following the government’s desire stay in business given the cash flow problems.
In 2008, governments around the world took stock in banks to keep the economy afloat because mortgage back securities had little value. Property prices were not rising and people could not keep up with payments so defaults were the result. In China, the government has made it easier for state backed property developers to buy up the distressed assets of debt laden private peers.
The way that will be done is, if a state backed developer buys distressed assets, it will not be counted as debt under rules that cap borrowing. The 3 red lines policy restricts the amount of net borrowing property developers can raise each year by placing caps on their debt ratios.
A state backed developer in theory has the resources of the taxpayer in their back pocket.
Linking to dividend paying stocks, all profitable companies are in constant contact with governments because government regulations impact the business. the issue is not what a government can and will do when expansion is the norm, but what they do when there is a downturn. How well does the company you invest in work with the government?
There are more questions than answers, till the next time – to raising questions.