If you look at pictures of China of 20 years ago and now you will notice a great deal more high rises both commercial office towers and apartment complexes. As China expanded its infrastructure system and people moved from the country to cities there was great deal for housing and being China, the government encouraged the building of the complexes. However, since COVID when the government shut down the economy for months, China is experiencing a downturn in its economy. For decades the only numbers from the government were about growth, with a downturn comes in companies not paying its debt.

In an article by Clare Jim and Shuyan Wang of Reuters, China’s largest private real estate developer is seeking to delay payment on a private offshore bond for the first time. What will Beijing do?

Adding to worries about contagion risk, a major Chinese trust company that traditionally had a large exposure to real estate, Zhongrong International Trust Co, has missed its repayment obligations on some investment projects.

In China, the trust companies are known as shadow banks and is roughly a $3 trillion industry. JPMorgan in a research paper said the rising trust defaults would drag the economy down by 0.3 to 0.4% points directly. It also expects a vicious cycle of real estate financing challenges.

Chinese President Xi Jinping has signaled he wants a different type of economy – one less dependent on government money propping up real estate values and funding infrastructure development. He wants high quality growth. He would perfer real estate companies fund their developments with up front sales.

China’s problems have been brewing for a number of years with the problems of aging labor force and high government debt, particularly at the local level. For years the country has kept the forces at bay with high government spending that often found its way into the housing market. Beijing has been stating housing is for living in, not speculation.

Country Garden has 3,121 projects outstanding and China Evergrande Group has 800 which translates into over 1 million houses and apartments under construction.

Country Gardens bonds are trading on less than 10 cents on the dollar and Evergrande has declared Chapter 11 bankruptcy.

Linking to dividend paying stocks, property companies use debt to finance construction and as long as they can pay it off, all is good. When property values and markets go into a cycle, there are concerns and for the most part investors are better to find alternatives and watch till the good cyce returns.

There are more questions than answers, till the next time – to raising questions.