Profit Potential in a Chinese Bankruptcy

There are several things to think about these days when investing in ADRs of Chinese companies. The Chinese economy is slowing down. The Chinese population has shrunk a bit. The US and its allies are cutting off China from the highest tech in the computer realm due to security concerns. China’s public and private debts have risen to high levels. The Chinese real estate sector is in trouble. An interesting investment opportunity may have arisen in regard to the Chinese real estate sector’s problems. There could be profit potential in a Chinese bankruptcy!

Investing in Country Garden

Country Garden is the biggest real estate developer in China. It has lost billions of dollars in value over the last few years and is edging toward default on as much as $200 billion in debt. The company’s ADR trades over the counter in the US. Its share price peaked at $53.60 in June of 2018. It has been on a downward slide ever since and trades at $2.69 on August 15, 2023. Common wisdom would tell an investor that this is the time to get out of Country Garden stock before the company falls into bankruptcy and look somewhere else to recoup one’s losses. However, this company’s story brings another to mind.

Country Garden vs General Growth

Country Garden was founded by in 1992 by a farmer and construction worker, Yang Guoqiang, who built the company from scratch. The family of the founder has controlled the company even as it went public. This reminds us of the Bucksbaum family who owned a grocery store in Des Moines Iowa. Three brothers founded General Growth in 1954 and built a shopping mall in Cedar Rapids, Iowa. They went on to be the biggest managers of retail space in the USA. During the Financial Crisis it was in danger of missing debt payments of nearly a billion dollars and its stock price had fallen by 98%. It filed for bankruptcy protection from the court. The result was that creditors were fully paid and shareholders made a substantial immediate recovery. About two years later the share price was back to its level prior to the Financial Crisis.

The point of this little story is that companies whose businesses are based on valuable assets commonly make it through bankruptcy protection. Thus, we are wondering about the potential profit of a Chinese bankruptcy with Country Garden. Anyone who bought General Growth stock when it was less than $1 was extremely happy when the share price moved back up above $40! The Country Garden situation is a mess right now as is, to a degree, the economic situation in China. However, Country Garden and the Chinese government have assets too.

Does China Have a Ben Bernanke or Hank Paulson?

Much of the credit for getting the US through the Financial Crisis goes to then Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson. Bernanke had previously studied the 1929 Wall Street Crash and subsequent Great Depression. What he understood was that well-intended but wrong decisions dried up credit at that time when the Fed and Treasury should have taken measures to loosen credit. China has structural issues in their economy with favor given to state run industries and those that support their strategic and military ambitions. If the Communist Party redirects the country’s efforts toward helping the economy instead of maintaining power for a handful of elite, there is hope for their economy and companies like Country Garden.

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