JPMorgan Raises EM Default Forecast Amid Concerns Over China Contagion Triggered by Country Garden

JPMorgan has revised its global emerging markets corporate high-yield default forecast, citing increasing concerns about contagion in China’s property sector due to the potential default by Country Garden.

In an Aug. 15 note, the U.S.-based investment bank raised its 2023 global forecast to 9.7% from 6%. It also raised its Asia high-yield default rate forecast to 10% from 4.1%, although this figure drops to 1% if China’s property sector is excluded.

JPMorgan predicts that China’s property sector will account for nearly 40% of all default volumes in 2023, followed by Russian corporates at 35% and Brazilian issuers at 12%.

This significant increase in JPMorgan’s default risk assessment highlights concerns that a Country Garden debt default will have far-reaching consequences on the Chinese property sector and the broader economy.

Compared to China Evergrande Group, which defaulted in 2021 and announced a debt restructuring program in March, Country Garden has a larger and more diverse portfolio of developments.

Country Garden, once one of China’s largest developers, has until early September to make coupon payments it missed on two dollar notes on Aug. 7. Last week, it also suspended trading in 11 domestic bonds and issued a warning that it expects to report a half-year annualized loss of up to 55 billion yuan ($7.5 billion).

JPMorgan also estimates that if Country Garden defaults, it could contribute $9.9 billion to the total global emerging markets high-yield corporate default volume for this year, bringing the total default volume for the Chinese property sector to $17 billion in 2023.

The bank predicts that a Country Garden default could also lead to $8 billion in defaults among other smaller Chinese property developers and an additional $2 billion resulting from a spillover to other Chinese high-yield sectors.

According to JPMorgan, over $100 billion of bonded debt in China’s property sector has defaulted in the past two and a half years. Prior to Country Garden, the Chinese property sector already accounted for $109 billion in defaults since the beginning of 2021, which is 94% of total defaults in Asia during that period.

JPMorgan also raised its default rate forecast for Latin America to 7.1% from 6.6% following Brazil’s Odebrecht Engenharia e Construcao’s potential debt restructuring that could affect $1.9 billion in dollar-denominated bonds.

The bank raised its default forecast for emerging Europe to 23.4% from 15.7% to reflect the inclusion of Russian corporate bond defaults, which were primarily due to “technical” reasons caused by sanctions from Russia’s war in Ukraine.