The Looming Crisis in the Chinese Property Market: A Closer Look at Country Garden’s Potential Default

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Will Country Garden’s Woes topple the entire Chinese Economy?

China’s property market, which has long been a powerhouse driving a significant portion of the country’s economic activity, is facing a severe crisis. Recent developments have raised concerns, with Country Garden, China’s largest private developer, sounding alarm bells about a potential default on its international debts. This situation adds to the existing troubles in the Chinese property sector, affecting not only the developers but also raising questions about the broader economic implications. In this article, we delve into the specifics of Country Garden’s predicament and its potential impact on the Chinese property market.

Country Garden’s Warning:

Photo of Shanghai across the river at night.
Shanghai – Photo by 765 Crystal

Country Garden’s recent announcement has sent shockwaves through the industry. The company, with nearly $200 billion in liabilities and close to $10 billion in dollar-denominated debt, revealed that it had missed a payment of HK$470 million ($60 million) on some of its debts and anticipated further difficulties in meeting offshore payment obligations. This unexpected deterioration in financial health comes after the 2021 default of its peer Evergrande, which had a cascading effect on the industry.

The Chinese Property Sector in Crisis:

Country Garden’s predicament highlights the precarious state of the Chinese property sector. For the past two years, the industry has been grappling with construction delays following developer bond defaults and declining demand. Country Garden reported a 44% drop in sales for the first nine months of the year, with sales falling for the sixth consecutive month in September. The company’s liquidity position is expected to remain tight in the short to medium term.

The Ongoing Debt Crisis:

Country Garden previously missed international bond payments in August, entering a 30-day grace period. Although it narrowly avoided default last month, the company now expects further non-payments within upcoming grace periods. This situation will undoubtedly put immense pressure on Chinese policymakers who initially aimed to reduce developer leverage in 2020. Despite recent government support measures and rate cuts, unresolved defaults continue to cast a shadow of uncertainty over the industry’s future.

The Impact on Other Sectors:

Country Garden’s woes are not isolated, raising concerns that the property crisis could spill over into other sectors of the Chinese economy. For instance, Zhongrong, a significant player in China’s $3 trillion shadow finance industry that lends money to developers, also missed payments over the summer. This contagion effect could potentially have far-reaching consequences beyond the property market.

Government Response:

In response to the growing crisis, Beijing has increased support for the property sector and lowered interest rates. Individual cities have also relaxed policies aimed at curbing surging property prices. However, these measures might not be enough to counteract the scale of the problem, especially with unresolved defaults continuing to undermine investor confidence.

Challenges Ahead for Chinese Property and Financial Sector

The potential default of Country Garden and the ongoing turmoil in China’s property market are cause for alarm. The crisis has far-reaching implications, not only for the property developers themselves but also for the broader Chinese economy. The fate of Country Garden, once considered healthier than other private developers, will test the resilience of Chinese policymakers as they navigate the complex challenges facing the property sector. As the situation unfolds, it remains critical to monitor how China addresses this crisis and the potential ripple effects it may have both domestically and internationally.

Featured photo by Herbert Bieser.

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