A friend of mine, surnamed Zhao, came to Beijing from neighboring Tianjin over the weekend. He came to the capital city not for travel, to visit friends or on business. He was trying to recover his investment.

He told me a long story about how he had given all his savings accumulated during the past eight years to his friend, who used the money and more borrowed from other friends and relatives to invest in the property market. As the market cools, investors are taking a beating.

“Initially, I can get pretty much interest repayment from him”, Zhao said, referring to his friend. “It made me happy.” “But last week, he suddenly disappeared.”

Zhao managed to learn that his friend was in Beijing under the de facto control of a number of “guarantee companies”, or companies that lend to cash-thirsty people and profit from high interest rates or help them secure bank loans and receive commissions. Zhao said it turns out that his friend has used all the money he had pooled and the high-interest loans from the “guarantee companies” to buy several apartments in Beijing. His calculation was that he could then use his apartments as collateral to borrow from the banks and repay his debt.

He had thought that so long as home prices continued to rise, the bank loans would well cover his loans. But the cooling of China’s home prices since late last year has made it increasingly difficult for him to get loans from the banks, thus causing his capital chains to fracture.

“He borrowed heavily from ‘guarantee companies’ to invest in apartments, but as the market cools, banks refused to lend to him as much as he had calculated,” Zhao said. “The bank loans cannot cover his high-interest-rate loans and his capital chain thus began to fracture.”

As China’s home prices soared in the past decade, authorities have started to impose restrictions on home-buying from 2010, a policy that has been carried into this year. Meanwhile, facing slumping property sales and the growing risk of default, the banks are also getting increasingly cautious in lending to property investors.

Zhao and his friend are obviously not alone as many speculators have been hit hard by the tightening of bank loans. In recent months there have been a large number of foreclosures reported in provinces such as Zhejiang and Jiangsu, where property speculation is more prevalent. Media reports show that large numbers of home-buyers had aimed to buy their homes to benefit from rising prices, but the unexpected price falls have contracted the value of their homes and made it unprofitable for them to continue to hold them and repay high interest to the banks.

Back in late 2008, when China’s prosperous real estate market experienced the first round of major price corrections, many property investors suffered from severe investment losses and the number of foreclosures soared at that time.

Luckily, the ensuing government stimulus, which amounted to 4 trillion yuan ($645 billion), helped reverse the tide and bailed them out. This time, however, the government might not repeat its rescue plan because of the many potential side effects of a major stimulus plan.

Some local governments have opted to loosen their previous restrictions on home-buying, but sales remain sluggish, partly because home prices have been so high that not many ordinary people can afford to buy. Prices in some major cities, such as Beijing, have at least doubled compared with five years ago, when the government released the massive stimulus program.

Now even the government wants to keep the property market stable — it does not have many low-cost options — except loosening its previously capped restrictions — in its toolbox.

Having to rely on themselves to sustain their cash chain, property investors will have a tough time as the market continues to cool. More foreclosures could ensue.