Country Garden Services (HKG: 6098) down 17% on China property rout

Country Garden Services (HKG: 6098) (OTCPK: CTRGF) shares fell 17.5% in Hong Kong today. This was the worst performance across the China property sector - well, except for the bonds of the parent, Country Garden, which now seem to be trading at 20%. That's for the dollar bond of course, the assumption being that overseas investors are far more likely to get it in the neck than anyone domestically.

That the Chinese property market has been a disaster for some time has been obvious, of course it has. The sector once provided some 25% of GDP and now seems near entirely frozen. But it was also true that Chinese savings were in the 40 to 50% of GDP range. That it was all bound to fall apart wasn't obvious. But that the boom went on too long was true and so there's something that must be done. 

That then becomes a question of political management. What is it that is going to be done? 

Country Garden Services share price from Hong Kong Stock Exchange

Well, what can be done? At this point there are really only two things that are possible. The first is that there is general support to the sector. Preferential interest rates, general economic stimulation, Keynesian demand management and all that. The problem here is that this has all been done, multiple times, in past years. It may not be that Austrian economics is wholly true all of the time but in extremis that argument that bubbles will pop and that they need  to pop is indeed true. Which leads to the second possible thing. The Chinese authorities agree that the bubble has popped and so allow large numbers of people to go bust. Of course this will be a managed process. But managed in whose favour? 

Foreigners will get the raw end of the deal, obviously. That's why the dollar bonds are trading at 20% of par. That's also what generally happened at Evergrande. The people who are likely to be protected, as far as that can go, are those who bought properties off plan. The people in the middle, who will get anything left over, will be domestic investors, bonds first then equity.

This isn't because the CCP is specifically communist or even Chinese. It's just what absolutely any government would do, anywhere, with a problem this size.  

So, any wobble in belief about which way the government is going to go has an outsized impact on the valuations of China property companies. Just what is happening here with Country Garden Services.