China Property Crisis Intensifies, Cloud over Country Garden

China’s property sector crisis intensified on Friday with shares and bonds of top developer Country Garden falling sharply.

News that the group – one of China’s biggest developers, with thousands of projects spread across nearly 300 cities – moved to refinance part of a 2019 loan sent its shares in Hong Kong down more than 5% and left its bonds close to record lows hit late last year.

“That doesn’t get them completely out of the woods,” said one Country Garden bondholder, who declined to be identified, adding that the developer, which has debt of more than $40 billion, faces a further batch of bond payments in coming months.

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The news capped a rocky week for the troubled sector, which has been stuck in a state of semi-paralysis for several years because of Beijing’s efforts to reduce its massive debts.

The downward trend accelerated during the Covid pandemic, when home sales slumped and the government imposed its ‘Three Red Lines’ policy to rein in unsustainable borrowing built up during a decade-long building boom.

Raymond Cheng, head of China research at CGS-CIMB Securities, delivered a similar warning and said it was part of the broader issue of the government’s approach to the crisis.

“If sales don’t improve people will worry about the repayment ability for developers like Country Garden who have large exposure in smaller cities,” Cheng said.

“Country Garden is a top developer in terms of sales. If it defaulted it would send a very bad signal to the market that the central government does not care (about) more developers going down and has no plan to bail out.”

Dalian Wanda, Sino-Ocean also hit by selloffs

Other high-profile, but debt-strained China firms, including Dalian Wanda Group and state-backed Sino-Ocean, have also seen sizable sell-offs this week amid a flurry of major rating downgrades.

Analysts at ANZ said the worst may not be over either with the sector facing $12.8 billion of dollar-denominated bond repayments before the end of the year, they estimated.

“New measures, while helpful, are no panacea for the sector’s woes. Other efforts are needed to boost buyers’ sentiment about the long-term trajectory of the property market,” they added.

Country Garden, which declined to comment on Friday’s selloff, is one of China’s top market players and its troubles are adding to the pressure for Beijing to provide additional support to the property sector, which previously accounted for around a quarter of China’s economic output.

JPMorgan’s analysts said Country Garden’s loan refinancing was “marginally credit positive” as a large part of the outstanding amount was being rolled into a new 30-month term instead of facing immediate repayment.

“That said, the onshore operating environment remains challenging for the developers, especially with no indication of relaxation of escrow account supervision,” they said.

Defaults on $120bn of property debts ‘and more coming’

This week’s other main problems in the sector, at Dalian Wanda Group, another of China’s most high-profile conglomerates, Sino-Ocean and the second default in just over a year by state-backed Greenland, have also unnerved investors.

Wanda, owned by China’s once-richest man Wang Jianlin, has $400 million bond payment due at its key property unit, Dalian Wanda Commercial Management (DWCM), on Monday. Rating agencies Moody’s and S&P Global are uncertain it will make it.

Wanda was one of the few private firms to have navigated the property crash of the past three years. DWCM had even managed to sell bonds earlier this year, in what was seen as an encouraging step for the sector.

Friday’s selloff saw Country Garden’s bonds fall to between 17 and 21 cents on the dollar – around of a fifth of their face value. Its onshore bonds, slumped roughly 30% each.

“Country Garden is in great difficulties,” said Yao Yu, founder of credit analysis firm Ratingdog, adding that it had more than 10 billion yuan ($1.4 billion) of debt due in the next two months.

Wanda Commercial’s bonds, which have plunged over 70% this year also slipped, leaving them at less than a quarter of their original face value.

Since the crisis began to snowball in 2020 a total of around $120 billion worth of Chinese property debt has defaulted, JPMorgan estimates.

The bank’s analysts expect another $9 billion of defaults this year. That does not include Country Garden, which has over $40 billion of debt, although the analysts say it is likely to need the government to provide fresh support to the sector.