Shuli Ren

South korea's dystopian drama Squid Game is poised to become Netflix's biggest hit ever. The destituteand desperate enter a bloody contest where theyplay a series of traditional children's gameswith just two outcomes: death or a45.6 billion won (HK$297 million) cash prize.

A blend of The Hunger Games and Parasite,the show has struck a nerve globally. While many see it as an exercise in class warfare, thegrotesque storyline will particularly resonate within China's business community.

In the first game, a creepy larger-than-life sized doll commands the players to run when she shouts "green light."Those who can't stay still when she shouts "red light,"or those who can't cross the finishing line in time, are killed.

This is whatChina's real estate developers are playing right now. I recently wrote that the situation was like The Hunger Games, but on second thought, it's reallySquid Game.

The so-called "three red lines"that China formalized last summer were meant to rein in developer debt, giving them limits they should not cross.

It wasa game changer for an industry that accounts for about 15 percent of the nation's economy.The edicts from on-high have been so absolute that developers can no longer profit from building residential blocks.

Some citiesembraced price controls.New home sales have slumped. Meanwhile, thefunding channels that property developers have depended on -including day-to-day supply chain financing-have all but dried up.

China Evergrande Group, the nation's second largest developer with more than US$300 billion (HK$2.3 trillion) in debt, is at the brink of a default. Country Garden Holdings, the nation's biggest home builder, has slumped 28 percent this year to an only US$22billion market cap.

In other words, if you're a private property developer – hold still -building residential homes is no longer for you. You've become a sunset industry.

Like humans, businesses havesurvival instincts. A companywants to be able to pay bills and earn profits.

And in this age where there are the three red lines that companies can't cross,the only "green light" developers are getting is in the property management business. Builders now want to become building managers.And the top players can't diversify fast enough.

Selling new homes isn't the right look this summer, now thatpresident Xi Jinping's"common prosperity" has instilled a politically-required socialist woke-ness.

The higher prices that developers need tomake money on are seen as a burden on the middle class – and the main reason that exacerbates wealth disparity in China. Property management, on the other hand, is still politically acceptable. No one in China has complained about rising services fees. Yet.

This explains a flurry of acquisition deals in the management space, and the lack of in project developments -not even at fire sale prices. Country Garden has been an active buyerof services, and Evergrande might just be able to offload its management subsidiary soonto pick up much needed cash.

They are onto something.

In the first half of the year, the 12 publicly listed property management companies tracked by CLSA reported a 70 percent rise in core earnings from 12months before.

Country Garden Service Holdings, the market leader, is up 15 percent this year. Trading at 36times 2021 earning, itnow boasts a higher market capthan its parent's core development unit, which is valued at just fourtimes earnings.

That's all good for now. But "Red Light, Green Light" is only the first of six games in the Korean drama. There will be harsher tugs of war, fitful alliances and melodramatic betrayals.

As the drama intensifies, the show throws out a simple question: "Who are you?"

Conglomerates changing their natures in the middle of China's current business crisis probably are asking themselves the same thing.

Arethe policy makers resetting the playing field for a profitable and stable future?Or are they justwatching – with Machiavellian cruelty -who survives and who does not?

bloomberg

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