Financial woes heighten doubts over reviving China’s struggling property sector, once a key driver of economic growth
The beginning of the week in Asia has been marked by a cautious atmosphere, with apprehensions regarding China’s property sector burdened by debt impacting both stock markets and the yuan. Despite the People’s Bank of China (PBOC) providing a robust stabilization, the yuan experienced its lowest point in a month.
China’s property predicament is becoming evident as two prominent developers in the nation grapple with their debt-related challenges in the public eye. Country Garden Holdings, a widely recognized developer, experienced a significant drop in the value of its shares, reaching historical lows due to the suspension of trading for nearly twelve domestic bonds.
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Concurrently, state-supported developer Sino-Ocean acknowledged its failure to fulfill interest payments totaling US$20.94 million. These financial difficulties are intensifying concerns that the anticipated revival of the faltering property sector, which was once a driving force behind China’s economic expansion, might ultimately prove to be an unattainable goal.
China’s property faces restructuring speculation amid bond suspension and market Concerns
Raymond Cheng, the Managing Director of CGS-CIMB Securities, commented that the suspension of onshore bonds by Country Garden suggests the possibility of a forthcoming restructuring. He speculated that the trading halt might have been enacted to prevent the potential disclosure of sensitive or confidential information, which could fuel market speculation and consequently impact any restructuring efforts.
Over the past month, China’s struggling property developers have reported sluggish business performance. Contracted sales among the top 100 developers plunged by 33.1 percent in July, amounting to 350.43 billion yuan (equivalent to US$48.4 billion), as indicated by CRIC, a China property consultancy. However, the current situation is distinct from the 2021 crisis faced by China Evergrande Group. According to JP Morgan’s August 8 report, this dissimilarity arises because 40 percent of the market has already experienced defaults since that time.
Following its failure to meet bond coupon payments totaling US$22.5 million last week, which has elevated the threat of default if it cannot fulfill the repayment within a 30-day grace period, Country Garden, once the largest Chinese developer, conveyed in a statement on Friday night that it is currently confronting the “most significant challenges since its inception.”
In Monday’s trading session in Hong Kong, Country Garden witnessed a substantial decline of over 18 percent, reaching HK$0.80. Meanwhile, an index monitoring mainland developers listed in Hong Kong experienced a drop of 4.5 percent, extending a 10 percent loss from the previous week, causing it to hover around the lowest point since November 2022.
Country Garden, previously the largest Chinese developer, released a statement on Friday night acknowledging that it is confronting its most substantial challenges since its establishment, after failing to meet bond coupon payments worth US$22.5 million last week. This failure has elevated the risk of default unless repayment is made within a 30-day grace period.
Country Garden Adapts Strategy Amid Debt Woes
According to CGS-CIMB’s Cheng, Country Garden seems to have assimilated lessons from its counterparts and has consequently shifted away from contemplating the repayment of a couple of debts to alleviate its liquidity challenges. Instead, the suspension of payments might serve as an opportunity for the company to present a comprehensive, long-term strategy before initiating discussions with its domestic creditors regarding debt extensions.
As of December 2022, Country Garden’s total liabilities amounted to 1.4 trillion yuan. A recent disclosure to the Hong Kong stock exchange indicates that the company anticipates reporting a net loss ranging from 45 billion yuan to 55 billion yuan for the first half of 2023.
Despite these circumstances, the company still confronts approximately 35 billion yuan worth of bond coupons that need to be repaid by January. This data is based on information compiled by JPMorgan.
Country Garden’s Credit Turmoil Predicted to Ripple Through Real Estate and Financial Markets
Moreover, the credit turmoil stemming from Country Garden is expected to have a cascading effect on both the real estate and financial markets of the country. Analysts, led by Kaven Tsang from the rating agency Moody’s, highlighted this likelihood in a report published on Friday.
The report elaborated, ‘While the sales decline experienced by Country Garden is likely a reflection of the challenging operational environment in China’s lower-tier cities, the broader nationwide drop in sales observed over the past two to three months may signify an extended recuperation period for the sector. This extended period of recovery comes against the backdrop of persistent concerns regarding subdued economic prospects, elevated unemployment rates, and the potential risk of incomplete projects among developers.
