Country Garden confirms China’s property market concerns

Country Garden confirms China's property market concerns

The Dire State of China’s Ailing Property Market: Country Garden’s Financial Crisis

Country Garden

China’s property market is facing a grave challenge as one of its major players, Country Garden Holdings Co., struggles to cope with mounting liabilities and a worsening market downturn. With total liabilities of 1.4 trillion yuan ($194 billion) at the end of last year, the company has recently announced its expectation of posting a net loss of up to 55 billion yuan for the first half of 2023, compared to earnings of about 1.91 billion yuan the previous year.

The news of Country Garden’s financial distress has sent shockwaves through the industry, exacerbating concerns about the potential drag it could have on the world’s second-largest economy. The announcement resulted in a sharp decline in the Bloomberg index of China’s junk dollar bonds, reaching its lowest level since last year on Thursday.

Investors and analysts worry that Country Garden’s predicament underscores the dire state of China’s ailing property market. “What Country Garden messaged in the latest announcement just confirmed investors’ worst fears about the dire state of China’s ailing property market,” says Wee Liam Goh, a portfolio manager at UOB Asset Management.

China’s authorities have been striving to revive demand in the real estate sector since late last year. As an integral part of the country’s gross domestic product, the sector’s decline poses a significant threat to overall economic stability. Despite efforts to stimulate growth, such as easing mortgage rates, the crisis persists, with home sales hitting a one-year low in July.

The property sector finds itself caught in a vicious cycle. An earlier government campaign to reduce debt burdens on developers resulted in a sharp decline in housing purchases, causing builders’ cash flow to dwindle and, consequently, leading to a record number of defaults. The situation became so dire last year that protesting homebuyers demanded the completion and delivery of apartments they had purchased but were left unfinished due to financial constraints.

The Chinese government intervened, pledging further measures to stabilize the property market following its Politburo meeting in late July. While positive policy signals have been evident since then, experts believe that tangible and timely policy support is crucial to ensure the stabilization of the property sector. Persistent defaults by developers could further dampen homebuyer confidence, posing a significant risk to the already-slowing economy, warns Andy Suen, co-head of Asia ex-Japan fixed income at PineBridge Investments.

The recent crisis at Country Garden was exacerbated by the failure of bondholders of two dollar notes, issued by the company, to receive coupon payments due on August 7. Yang Huiyan, one of China’s richest women, leads Country Garden. The turmoil unfolding at the company coincides with signs of weakening economic demand. Consumer and producer prices fell in July compared to the previous year, raising concerns about the sustainability of the economic recovery from the rollback of pandemic measures.

Tommy Wu, senior China ANBLE at Commerzbank AG, emphasizes the urgent need to rescue the real estate sector given its crucial role in the ongoing economic recovery. Wu warns that the failure of another major Chinese developer would put tremendous pressure on the already-slowing economy.

In conclusion, the financial crisis faced by Country Garden highlights the challenges plaguing China’s struggling property market. The sector’s decline poses risks to economic stability, and despite government efforts, the crisis persists. The timely implementation of supportive policies is essential to stabilize the market and restore homebuyer confidence. Failure to address the issues could have severe consequences for China’s already-slowing economy.