China's back online and investors are coming to terms with a raft of property curbs that were announced over the holiday period. They'd better hope they work, or things could get worse.
Stocks of several developers plunged in Shanghai and Shenzhen Monday after some 20 cities unveiled real estate price-cooling measures effective early October. The trouble is, the last time authorities went around imposing curbs on home buying it didn't work, so they had to rely on the companies themselves. If that happens again, you can expect to see a far greater sell-off.
In 2010, after a raft of price curbs failed to have the desired effect, Beijing turned its sights on developers directly. It limited their ability to fund land acquisitions with bonds and loans, and by and large halted any approvals for new equity offerings.
Investors were the worst hit. Have a look at the trajectory of Country Garden, which between 2010 and 2012 was one of the largest real estate firms listed in Hong Kong:
Developers did find ways to get around the limitations, but they included resorting to shadow banking and other creative methods that would allow money raised abroad to pass the test back home. Such tactics can backfire, and many are still coping with elevated interest rates from some of the trust advances they got.
Investors better hope these price-cooling measures work. If they do, then it follows that the value of property on developers' books will decrease, as will future profits.
But at least they'll be able to fund themselves through regular channels, which longer term could mean avoiding sky-high borrowing costs, and defaults. A little short-term share market pain is a small price to pay.
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