Country Garden shares experienced a significant decline on Monday, reaching the lowest point in eight months, as concerns over debt resurfaced within the Chinese property sector. The stock market slump was spearheaded by Country Garden, whose Hong Kong-listed shares plummeted nearly 7%, marking their lowest level since November of last year. The property services division of Country Garden, known as Country Garden Services, also suffered a drastic drop of over 15%. In response to the situation, JP Morgan downgraded both companies to “underweight” and significantly reduced their target prices. The bank’s analysts cautioned that unless the Chinese government provides additional policy support, liquidity concerns are likely to persist.
The Hang Seng Mainland Property Index, which serves as a benchmark for Chinese property counters listed in Hong Kong, declined by over 5%—an underperformance compared to the 1.5% drop in the Hang Seng Index. Other prominent Chinese property developers such as Longfor Group, Sunac, China Vanke, and China Overseas Land and Investment also experienced notable decreases in their stock prices.
Country Garden is widely recognized as one of the largest property developers in China. However, last week’s attempt to refinance a portion of its 2019 loan facility failed to reassure investors about their ability to manage their debt. JP Morgan responded by significantly reducing the target prices for both Country Garden and Country Garden Services. The target price for Country Garden slumped by over 60% to HK$0.90, while Country Garden Services’ target price plummeted by nearly 70% to HK$6.70.
This downturn in the Chinese property sector follows a week of substantial losses due to weak property-related data and the belated release of the earnings report for property giant Evergrande, which revealed the full extent of its default. Since August 2020, China’s property sector has struggled to recover from a credit crisis exacerbated by government regulations aimed at curbing excessive debt accumulation. Years of rapid growth resulted in the construction of numerous uninhabited cities, with an oversupply of properties due to developers capitalizing on the demand for homeownership and property investment.
Wall Street banks have cautioned that the weakness in China’s real estate sector could continue to burden the economy for years to come and even impact neighboring countries. Goldman Sachs economists predict that the property market will experience an “L-shaped recovery,” characterized by steep declines followed by a slow and gradual rebound. Official data from last week revealed a 7.9% decline in property investment during the January to June period, surpassing the 7.2% decline observed from January to May.
China Vanke, the country’s second-largest developer, acknowledged that the sector is currently under immense pressure, with the situation being worse than initially anticipated. Similarly, Evergrande, the world’s most indebted property developer, reported a combined loss of $81 billion in its long-delayed earnings report released last Monday. The company, which defaulted in 2021, announced an offshore debt restructuring program in March as it struggled to complete projects and fulfill obligations to suppliers and lenders. For additional information on China, please visit CNBC Pro.
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