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China’s largest private developer has confirmed what investors had been dreading. Country Garden is on the verge of default and seeks assistance from legal advisers to navigate the consequences. The impending real estate crisis in China not only jeopardizes household wealth and jobs within the country but will also send shockwaves through Asian markets.
With $60 million due and grace periods expiring soon, Country Garden is unable to meet its financial obligations. The developer carries a hefty $200 billion in liabilities, including $10 billion in dollar-denominated debt.
As a result, an unprecedented restructuring is anticipated; however, it is unlikely to provide much relief to creditors. Dollar bonds of Country Garden are trading at just 5 cents on the dollar, similar to what creditors of other defaulted peers receive during liquidation.
Country Garden’s shares have plummeted by nearly three-quarters this year, rendering them penny stocks.
Investors are haunted by the memories of the 2021 fallout in Asia’s high-yield bond markets and equities following Evergrande’s default. This time, the impact is expected to be much greater as Country Garden has four times the number of housing projects compared to Evergrande.
Unlike Evergrande, Country Garden was once considered a safe bet on China’s property sector. Its robust balance sheet attracted a diverse range of investors, including foreigners.
These investors have already suffered significant losses. The full extent of the economic damage caused by Country Garden will take time to unravel.
In September, Country Garden’s sales volumes plummeted by 81 percent, and market prices have yet to hit rock bottom. Despite aggressive policy easing, sales continue to decline. As much as 80 percent of China’s household wealth is tied up in property.
Last year, net household wealth experienced the largest decline in two decades, with many savings caught in a declining and illiquid market. Consequently, Chinese property owners will feel a decrease in wealth and reduce their consumption. This will further fuel the country’s economic slowdown and have a ripple effect on equity values across various sectors.
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