China’s Country Garden facing REIT default concerns – J.P. Morgan

China's Country Garden facing REIT default concerns - J.P. Morgan

“Country Garden Turmoil Could Trigger Financing Stress on REITs”

Country Garden Turmoil Could Trigger Financing Stress on REITs

Aug 14 (ANBLE) – Turmoil at China’s largest private developer Country Garden could set off a “vicious cycle” of financing stress on the country’s real estate investment trusts (REITs), brokerage J.P. Morgan warned on Monday.

The Chinese conglomerate Zhongzhi Enterprise Group has faced issues that have raised concerns at brokerage J.P. Morgan. Two Chinese listed companies have reported non-payment on maturing investment products from Zhongzhi Enterprise Group’s unit, Zhongrong International Trust.

If REITs fail to honor payments on debts, they would have to dip into their profits. This puts nearly 2.8 trillion yuan ($385.78 billion) worth of assets under management at risk.

Meanwhile, troubles have arisen for Country Garden as it seeks to delay payment on a private onshore bond for the first time. Additionally, the company has suspended trading in 11 onshore bonds.

“Unlike banks, which have holding power and are able to roll over credit to wait for an eventual resolution, alternative financing channels such as trusts may default once trust investors are unwilling to roll over the products,” noted J.P. Morgan analysts led by Katherine Lei.

The default events may lead to a chain reaction on developer financing, adding stress to privately owned enterprise (POE) developers and their creditors. The property sector in China has been grappling with a liquidity crunch since late 2021 when China Evergrande Group collapsed and triggered a series of debt defaults.

J.P. Morgan warned that rising trust defaults would directly drag down economic growth by 0.3-0.4 percentage points. Analysts at Nomura have criticized Beijing’s slow response to ease tensions in the property sector, stating it has been “too slow and too little.” They expect China to be compelled to take additional measures.

According to J.P. Morgan analysts, potential policy routes could include a cut to the reserve requirement ratio and a “small-scale” government bailout program for local-government financing vehicles. However, they do not foresee large-scale monetary easing or fiscal stimulus.

It is clear that the current situation at Country Garden and the potential ramifications for REITs highlight the challenges and pressures faced by the Chinese property sector. The actions taken by the Chinese government will be closely watched in the coming weeks, as they strive to balance stability in the sector with the need for reform and sustainable economic growth.

Note: The exchange rate used is $1 = 7.2581 Chinese yuan renminbi.