Remember China Evergrande, that Chinese real estate giant whose mountain of debt sent global markets soaring in 2021? Its collapse then marked the start of a slump for China’s property market, where apartment sales came to a halt and developers big and small found themselves unable to pay their bills.
Now the financial troubles of Country Garden, another real estate giant, are raising new concerns. It is also a flashing warning sign about the Chinese economy.
Country Garden, the country’s biggest property developer by sales, has been beaten twice in the markets in the past week. Investors are panicked by two events: On August 1, the company abandoned a plan to inject much-needed cash into the business. Then, this week, he missed two bond interest payments. The bond payments, which are due in US dollars, have a relatively low value, but by missing them, the company has exposed itself to the risk of default.
Country Garden’s stock market value has more than halved since the start of the year. Some of its bonds were traded by traders for as little as 10 cents on the dollar this week, a sign of doubt that they expected to be repaid in full.
That this is happening to Country Garden worries investors. It had benefited greatly from support measures in the housing market last year, which included more financial support. For a time, he was designated as a model developer by the Chinese authorities. This made lending to the company more palatable when many other Chinese developers were struggling. But recent events have brought Country Garden to a point of distress that was unthinkable a year ago, when it made nearly $50 billion in sales. The concern now is that even though Beijing has pledged to provide further support to the housing market, the measures may not be enough.
Much of the squeeze in Country Garden’s financial situation stems from a decline in sales of its apartments. Fewer and fewer people in China are interested in buying properties right now. The company issued a profit warning in July, saying it would lose money in the first half of this year, in part due to a “downtrend in property sales”.
Country Garden is facing a cash crunch at a time when the entire real estate sector is lagging and Chinese leaders are trying to revive it. There had been some optimism in July when key government decision makers promised policies to help. Much of the initiative involves the country’s biggest cities, such as Shenzhen and Shanghai, and the measures are unlikely to benefit Country Garden, which operates more in smaller cities.
The two bond payments Country Garden missed this week aren’t a lot of money for the company, which also has a 30-day grace period. But if Country Garden fails to make the payments, it will trigger a default, scaring those who have lent it money in the past. The company did not respond to a request for comment.
As Sandra Chow, co-head of Asia-Pacific research at CreditSights, put it: “The developer’s struggle to meet even a modest coupon payment underscores the depth of its cash crisis.”
More broadly, Country Garden’s potential default is another worrying sign for China’s economic outlook as its leaders seek to restart the economy after three years of strict Covid prevention measures that have suppressed economic activity. Home sales fell in the first half of the year, a decline that accelerated last month. One in five young Chinese is unemployed. People don’t spend money, leading companies to cut prices. In small towns, where Country Garden continues to build its sprawling residential complexes, authorities are faced with an oversupply of housing and a steady decline in population.
Nervous investors will make Country Garden’s financial pressures more pronounced. The company has fared less well than the broader market and developers who are concentrated in major cities, where the real estate downturn has not been as pronounced. Country Garden’s contract sales fell by almost a third in the first six months of the year.
Even if Country Garden manages to make the interest payments on these bonds in the coming weeks, the developer is still not out of the woods. According to Moody’s, bond payments fall due each month for the rest of the year, and some $2.4 billion in bonds due to investors in China and $2 billion in bonds due to investors foreigners by the end of 2024.
The prognosis is not great. Investors fear contagion from Country Garden’s growing problems. Shocked creditors who continued to lend to private developers might think twice before giving them more money. Homebuyers can stay away from a business on the verge of collapse. They have already seen this film.