Country Garden Holdings (HKG: 2007) shares are up 17% in Hong Kong today. That makes a 30% rise over the past few trading days. The reason here is that the only real force impacting the China property sector equities is what is the government going to do about China property companies? The latest news is that the government has prepared a little list of some 50 companies that will gain preferential treatment in trying to deal with their debt burdens. The rise in Country Garden is because, apparently, it’s on that little list: “China has placed debt-laden Country Garden Holdings Co (2007.HK) on a draft list of 50 developers eligible for a range of financing support, Bloomberg reported on Wednesday, citing people familiar with the matter. Other distressed developers, such as Sino-Ocean Group (3377.HK) and CIFI Holdings (0884.HK) also figure on the list, it added.”
Well, OK, We’ve also seen a substantial rise in Sunac China as they apparently meet the conditions to be on that list. In fact, one of the driving forces has been if China Garden then so also Sunac.
Country Garden Holdings share price from Google Finance
The basic problem is that given the turn in the Mainland property market - the vast overbuilding, the massive debt burdens of near all the developers - most of the companies involved are bust by any rational standard. As we’ve said about China Garden: “That’s what the risk is here. Not that Country Gardens is going to go bust - that’s already happened, the question is whether the formalities will follow reality or not. Will the Chinese government change macroeconomic policy to support the property sector or not? The risk that it will is, in our minds, the only risk that Country Garden is not heading to zero and rapidly.”
There was also that quickly squashed rumour that Ping An would buy into Country Garden: “Ping An (HKG: 2318) has been asked by the Chinese Government to prepare a plan to take a majority stake - or at least control of - in Country Garden (HKG: 2007). This is the sort of plan which will appeal to the bureaucratic mind. It’s also something we’d not expect markets to like in the slightest. For the combination has the ability to wreck both companies, not just the one that’s already pretty much bust.”
The big question here is now about that list of 50 companies to be supported. OK - but is the equity going to be supported? Or is the equity going to be the price of the debt support? In a rational financial market it would be the second - the equity goes to nothing, shareholders are wiped out as the price of supporting the debt loads. So, how rational is the economic policy of the Chinese Communist Party? That’s the bet on that equity valuation.