Trading Moody's Downgrade of the Chinese Property Sector (TAO, CHIM)

Moody's Investors Service announced on Thursday that it downgraded its outlook for the Chinese property sector to Negative from Stable, as the government continues its efforts to cool inflation.

Moody's said that high inflation rates have led to China's government imposing stricter regulations on the property sector and that the likely result will be slowing sales and lower profit margins.

After seeing protests spread throughout North Africa and the Middle East, the Chinese government is particularly concerned that anger over rising prices may lead to unrest in China.

In order to prevent that from happening, China's federal and local governments have stepped up their efforts to fight inflation.

Some of these measures include hiking interest rates, raising the share of deposits that banks are required to hold in reserve, announcing a $200 billion plan to build and renovate 10 million homes, increasing down payment requirements and introducing property taxes aimed at cutting into the profit of real estate speculators.

Moody's also said that property developers will face increasing difficulties when seeking financing. The result is that developers may begin looking offshore to finance their projects.

This sustained effort by China's government to reduce inflation and cool the housing market should result in falling sales for the real estate sector.

Moody's said that it expects that proceeds from contracted sales of residential properties in China's first and second-tier cities will fall by an average of 25% to 30%.

There are a number of investment options for investors who want profit from activity in the Chinese real estate market.

Investors who want exposure to Chinese real estate and think that the concerns over real estate prices are over-stated should take a look at the Guggenheim China Real Estate ETF (NYSE: TAO).

If real estate prices do drop, the Global X China Materials ETF (NYSE: CHIM) could still benefit from China's $200 billion plan to build and renovate 10 million homes because the Chinese materials and commodities sector would see rising demand from so many new homes hitting the market and the purchase of consumer appliances and furniture that would follow.