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When China’s largest developer expresses difficulty in seeing the “dawn light,” it raises concerns not only for the Chinese but for everyone. Country Garden, which is projected to be the country’s top developer in terms of sales for 2022, issued a warning on Friday stating that it could incur a first-half loss of $7.6bn. Additionally, it confirmed earlier this week that it had failed to make interest payments on two bonds.
For the past two decades, China’s heavily leveraged property sector has continuously defied predictions of a collapse. However, the troubles faced by Country Garden, previously regarded as one of the safest major developers, indicate that a collapse is becoming increasingly likely.
The company’s shares plummeted to a historic low of HK$0.98 on Friday, marking a 64% decline this year. According to Bloomberg data, one of Country Garden’s dollar bonds, due in January, fell below 9 cents on the dollar this week. Moody’s downgraded the company to Caa1, placing it deep into junk territory.
While Country Garden has a 30-day grace period for the missed payments this week, it faces over $1.2bn in new payments coming due next month. With $10bn in outstanding dollar bonds and total liabilities exceeding $190bn at the end of last year, the company’s situation, manageable when asset prices were stronger, has now become precarious.
This comes two years after the notorious default by China Evergrande Group, another high-risk Chinese company. The strain on Country Garden occurs despite vigorous official efforts to contain contagion.
The rapid deterioration of this once strong company deals a severe blow to investor confidence. Despite aggressive policy easing, property sales dropped by 28% in June, the sharpest decline this year. Unless local homebuyers return to the market in large numbers, the situation will worsen.
Under pressure, Beijing must accelerate the implementation of stimulus packages to support the economy, as the property sector accounts for almost a quarter of China’s GDP.
Given these circumstances, it is advisable for investors to steer clear of Chinese property stocks and bonds. Trying to take advantage of potential opportunities now would be a risky move. The concern is not whether contagion will spread, but rather how far it will extend within the Chinese economy and beyond.
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