Longfor Group (HK: 0960) (OTCPK: LGFRY) shares are up 9% and change in Hong Kong today on the hope that someone, sometime, is going to do something about China's property market. Yesterday the American quote was down 6% on the idea that someone wouldn't. So we've a certain amount of volatility here and yes, 6% and 9% in something with a $13 billion market capitalisation is volatility. We're talking of near a $billion change in value with each of those movements. That's a lot.
Longfor is in that Mainland China property business “Longfor Group Holdings Limited, an investment holding company, engages in the property development, investment, and management businesses in the People's Republic of China.” Well, OK, we can all have opinions on how well that might do. But the obvious point to make is that the health of such a business relies, clearly, on the health of the underlying property market.
There have been, shall we say politely, concerns about the viability of the Chinese property market over the past few years. The idea that the country has been vastly overbuilt has been floated. In response it's worth pointing out that no large country has got richer so fast and for so long. So the property developments that took - say - a century or two in England might well happen in 30 years in China. For if we look at GDP China really did compress two centuries' worth of British GDP growth into only 30 years in China. So at that larger scale it's possible to argue it either way.
Longfor Group share price from Hong Kong Stock Exchange
But even within that there have been some obvious examples of corporations getting over-extended, unable to service debt mountains and so on. And then we come to the politics. The CCP's claim to legitimacy is that it knows how to run the overall economy better than mere market based capitalism would or does. OK. That does mean though that no disasters can be allowed to happen. This leads to the politics of the property market.
Say that the market actually is over-extended. Mass failure is something that cannot be allowed because of that oversight role. So, therefore, the assumption is that something will be done even if there is that problem.
That is then what drives the volatility in Mainland China property stocks like Longfor. Marginal changes in business prospects, well, that's just how a market works. But major changes? That's when we might speculate that there will be political action to stabilise the marketplace. Which is what is happening here - a rising assumption that there will be that stabilisation. Therefore Longfor Group shares rise in anticipation of that political action. The political action which may, or may not, happen of course.
