China's Country Garden Stocks Plunge on Foreign Debt Warning

China’s Country Garden stock plunged 10.7% on Tuesday after it warned that it may not be able to repay all of its offshore debts on time.

In an exchange filing on Tuesday, the country’s largest private property developer said it was grappling with debt restructuring.

“Such non-payment may lead to relevant creditors of the Group demanding acceleration of payment of the relevant indebtedness owed to them or pursuing enforcement action,” the company said.

The group faces “significant” uncertainty on disposing of its assets and its cash position remains under pressure, it said. “The group’s liquidity position is expected to remain very tight in the short- to medium-term.”

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The developer said it had appointed Houlihan Lokey, China International Capital Corporation (CICC) and law firm Sidley Austin as advisers to examine its capital structure and liquidity position.

Country Garden shares rose 3% in early trading on Tuesday, having lost nearly 70% of their value since the start of the year. However, the stock rise was short-lived and it fell close to 11% by the close of trading in Hong Kong.

Companies accounting for 40% of Chinese home sales – mostly private property developers – have defaulted on debt obligations since a liquidity crisis hit the sector in 2021, leaving many homes unfinished.

The problems have deepened in the past two years as confidence in housing and capital markets dried up, further squeezing developers’ liquidity.

Country Garden was due on Monday to pay $66.8 million in coupons on 2024 and 2026 dollar bonds, although the payments have a 30-day grace period.

$15m due next week, but offshore bonds top $16bn

The developer faces another big test next week when its entire offshore debt could be deemed in default if it fails to pay a $15 million September coupon by October 17.

Country Garden has $10.96 billion offshore bonds and 42.4 billion yuan ($5.81 billion) worth of loans not denominated in yuan. If it defaults, these debt will need to be restructured, and the company or its assets also risk liquidation by creditors.

The company recorded contracted sales of around 154.98 billion yuan for the nine months till September, a drop of close to 44% and 65%, compared with corresponding periods in 2022 and 2021.

Country Garden said it would make “its best effort to ensure the delivery of properties, which is the group’s most critical corporate responsibility and is the key pillar to safeguard the property market.”

Forceful action needed, IMF says

China’s government has recently implemented a range of measures from reducing deposit requirements to cutting existing mortgage rates in some cities to help renew confidence among home buyers to support the property market.

But Nomura’s Tu Ling said in a note on Tuesday: “The property sector showed signs of weakening again, despite the raft of easing measures rolled out in September; this was especially the case in low-tier cities, which might be further squeezed by the easing of restrictions in high-tier cities.”

And the International Monetary Fund (IMF)’s chief economist Pierre-Olivier Gourinchas said that China needs to take “forceful action” to clean up its real estate sector, as while some steps had been taken, more work was required.

“If that doesn’t happen, then there is a chance that that problem could fester and become worse,” he said.