With 1.4 trillion yuan ($194 billion) in total liabilities at the end of 2022, one of China’s biggest developers, Country Garden Holdings Co., has acknowledged that it underestimated the market downturn, and is now facing the most dire circumstances it has faced since it was founded in 1992. The company is now expecting that it will post a net loss of as much as 55 billion yuan ($7.66 billion) in the first half of this year, compared with earnings last year over the same period of roughly 1.91 billion yuan ($265 million).
Country Garden Real Estate Group Co Ltd. has announced it will be suspending trading in almost a dozen onshore bonds beginning Monday, just two days after an announcement by the company’s controlling shareholder that it is going to report a multi-billion dollar loss for the first half of 2023.
As Country Gardens wages a very public battle with liquidity issues, concerns for the effects the real estate development sector will have on the broader Chinese economy are only growing, causing a Bloomberg index of the nation’s junk dollar bonds to fall to the lowest level in a year, on Thursday.
Wee Liam Goh, a portfolio manager at UOB Asset Management said, “What Country Garden messaged in the latest announcement just confirmed investors’ worst fears about the dire state of China’s ailing property market”
Within the Chinese government, regulators have been trying to ignite demand in the real estate sector since late last year. Real estate is responsible for roughly a fifth of the gross domestic product of the nation. Easing mortgage rates on the purchases of first homes has failed to affect the issues, with home sales falling in July the most in a year.
The housing sector in the nation has been caught in a vicious cycle, after measures the government implemented designed to drive deleveraging among developers caused home sales to slump, which crimped the cash flow of builders, which led to a record number of defaults.
As builders ran out of the cash to finish apartments, buyers who had taken out mortgages to buy apartments which were not delivered protested, driving the government to intervene.
Andy Suen, co-head of Asia ex-Japan fixed income at PineBridge Investments said, “While there have been positive policy signals, …the property sector requires more tangible and timely policy support for stabilization. Persistent defaults among developers could further dampen homebuyer confidence.”
According to bondholders who requested to remain anonymous in reports, two dollar notes issued by Country Gardens did not receive their coupon payments, which had been due August 7th. That report ignited the latest crisis of confidence, and the resultant concerns over follow-on effects on the Chinese economy.
As this crisis spins up, other signs have emerged pointing to the fact that economic demand is weakening, causing hopes of a rapid economic recovery to peter out.
The latest data shows that in July, consumer and producer prices fell, compared to one year ago. The fall in prices was called temporary by the statistics bureau, which claims consumer demand in improving.
Tommy Wu, senior China economist at Commerzbank AG said that in the end, “the economic recovery from the Covid reopening is mainly a consumption recovery, which makes it even more crucial to rescue the real estate sector at the current juncture. The failure of another major Chinese developer would pose tremendous pressure on the already-slowing economy.”
