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Remember China Evergrande, that Chinese real estate behemoth whose mountain of debt sent global markets spiraling in 2021? Its collapse signaled the start of a crisis for China’s housing market, where sales of apartments ground to a halt and developers big and small found themselves unable to pay their bills.
Now, financial troubles at Country Garden, another real estate giant, are raising fresh concerns. They are also a flashing warning sign about China’s economy.
Country Garden, the country’s biggest developer by sales, has been pummeled in the markets twice in the past week. Investors are panicked by two events: On Aug. 1, the company scrapped a plan to inject cash into the business, something it needs. This week, it missed two interest payments on bonds. The bond payments, which are owed in U.S. dollars, are relatively small in value, but by missing them, the company put itself at risk of default.
Country Garden’s market value has been more than halved since the start of the year. Traders were swapping some of its bonds for as little as 10 cents on the dollar this week, a sign of doubt that they expected to be paid back in full.
Investors are alarmed because Country Garden had largely benefited from measures to bolster the real estate market last year that included more financial support. For some time, the Chinese authorities designated it as a model developer. This made lending to the company more palatable, when many other Chinese developers were in trouble.
But recent events have led Country Garden to a point of distress that was unthinkable a year ago, when it was making nearly $50 billion in sales. The worry now is that even as Beijing has pledged more support to the real estate market, the measures may not be enough.
Much of the squeeze on Country Garden’s financial position has come from a drop in sales of its apartments. Fewer people in China are interested in buying homes. The company issued a profit warning in July, saying it most likely had lost money in the first half of this year, in part because of a “downward trend of real estate sales.”
Country Garden is facing a cash crisis when the real estate sector is in the dumps and China’s leaders are trying to rev it up. There had been some optimism in July when top government decision makers pledged policies to help. Much of the initiative is in the country’s biggest cities, like Shenzhen and Shanghai, and the measures are unlikely to benefit Country Garden, which operates more in small cities.
The two bond payments that Country Garden missed this week do not amount to a lot of money for the company, which also has a 30-day grace period. But a default could scare those who have lent it money in the past. The company did not respond to a request for comment.
As Sandra Chow, co-head of Asia-Pacific Research at CreditSights, put it: “The developer’s struggle to address even a modest coupon payment underscores the extent of its cash crunch.”
More broadly, Country Garden’s potential default is another ominous sign for China’s economic outlook as its leaders look to reboot the economy after three years of stringent Covid prevention measures that suppressed activity. Home sales were down in the first half of the year, a decline that accelerated last month. One in five young Chinese is out of work. People are not spending money, leading companies to slash prices. In smaller cities, where Country Garden continues to build its sprawling residential complexes, authorities are facing an oversupply of housing and a steady decline of population.
Nervous investors will make Country Garden’s financial pressures more pronounced. The company has fared worse than the broader market and developers that concentrate in bigger cities, where the real estate slowdown has not been as acute. Country Garden’s sales under contract plunged nearly a third over the first six months of the year.
Even if Country Garden manages to make the interest payments on these bonds in the coming weeks, it is not out of the woods. It has bond payments due every month for the rest of the year, according to Moody’s, and some $2.4 billion of bonds owed to investors in China and $2 billion of bonds owed to foreign investors by the end of 2024.
The prognosis is not great. Investors fear contagion from Country Garden’s deepening troubles. Shellshocked creditors who have continued to lend to developers might think twice before giving them more money. Home buyers may stay away from a company on the precipice of collapse. They’ve seen this movie before.
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