All markets are partly a belief system, people tend to believe that prices eventually will go up. Prices may not go everyday, but overtime prices go up. The belief system encourages people to buy and sell the goods and products. In all markets there are quality or the best goods and there are some that should be discounted. When prices decline on a regular basis no one is quite sure what to do.

In an article by Daisuke Wakabayashi and Claire Fu of the New York Times News Service, the unwavering belief of Chinese homebuyers that real estate is a cannot lose investment, meant that real estate was 25% of the Chinese economy. The problem is for the past 2 years, real estate development firms have massive debts and sales of new homes have dropped considerably as well as prices continue to fall.

The sharp loss of faith in property, which similar to America, is the main store of wealth for families, what should the government do? The biggest developer, Evergrande Developments is being liquidated as it has $300 billion in debt.

According to Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at Natixis, the market has not touched bottom and there is still a long way to go.

For owners, there was hope on the horizon. the Chinese government had massive shutdowns during the pandemic and there could be pent-up demand for new properties as restrictions eased.

Nomura Securities estimates there are still 20 million units of presold homes waiting to be sold requiring $450 billion in funding to complete. One of the many problems is since 2020, the policy makers in Beijing, worried about a housing bubble effects on the banking system, rolled out rules to curb excessive borrowing of real estate developers. Without easy access to debt, developers struggled to pay off loans and finish building properties that were sold in advance.

Xiao Yuanqi, deputy director of China’s National Financial Regulatory Administration said the country’s financial institutions had an inescapable responsibility to provide strong support to the property sector. Banks should extend loans to property developers.

Since 2021, more than 50 Chinese property firms have defaulted on debt with the 2 largest firms Evergrande and Country Garden both gone into bankruptcy.

Country Garden said presales of unfinished apartments fell from the 9th consecutive month to $1.3 billion down 69% from a year earlier. In the 2nd half of 223, presales were down 74% for a year earlier.

Larry Hu, chief China economist at Macquarie Group, said the key thing in 2024 is if and when the central government would step in and take the main responsibility to stop the contagion. Mr. Hu believes the Chinese government could act similar to the US with the TARP or Troubled Asset Relief Program which essentially means the government takes the debt off financial institutions to allow them to lend again, in the hope that prices will rebound in the future and then the assets can be sold at a profit. In the US, after the housing crisis of 2008, there was the rise of hedge funds to buy subdivisions to rent out, will that happen in China?

Linking to dividend paying stocks, when profits are to be made, no one likes government regulations, once loses are happening, companies rush to have some sort of government regulation and politicians will agree. As investors we all love the free market system, but it is not really free, we all expect and hope for the investments we make there will be an exception if the market prices fall to new lows. In every industry, the government typically wants it to do well and encourages it, but when things go down, the lobbyists will look to the government for help because of the size, the scope or the value to the economy in general. Investing in profitable companies is never a guarantee that they stay profitable for years, but that is what you hope for and if the industry they are involved with suffers a downturn, move your money to other alternatives.

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