China’s real estate crisis worsens as another primary developer risks insolvency.

China's real estate crisis worsens as another primary developer risks insolvency.

China’s real estate crisis worsens as another primary developer risks insolvency. This week, allegations that one of China’s largest private building conglomerates failed to pay interest on two bonds shook investor confidence in the country’s troubled real estate market.

For many years, as much as 30 percent of the country’s gross domestic product (GDP) was driven by China’s extensive real estate industry.

But many significant developers amassed enormous debts, exemplified by Evergrande’s bankruptcy two years ago, followed by a surge of defaults across the industry.

Country Garden, once China’s largest developer, is the latest significant industry player to run into trouble.

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Since Tuesday, shares of the construction colossus have dropped 16% in Hong Kong following Reuters and Chinese media reports that it failed to pay interest on two US dollar-denominated bonds. Several of Country Garden’s yuan-denominated bonds were suspended from trading in Shanghai and Shenzhen on Tuesday following a more than 20% decline in value.

State-owned media outlet Paper. Cn reported on Tuesday, citing an anonymous company source, that Country Garden experienced “temporary liquidity pressure” due to declining sales and a challenging refinancing environment. A person was quoted as saying that the company was “actively” seeking funds to resolve its debt crisis and would safeguard the legitimate rights of creditors.

Even though Country Garden has a 30-day grace period before being labeled a defaulter, the market’s loss of confidence indicates that investors are concerned about the company’s future.

Country Garden is one of the few significant private developers that has not defaulted since a liquidity crisis engulfed China’s real estate market more than two years ago.

According to the China Index Academy, a prominent Chinese real estate research firm, the company fell to No. 5 by sales in the first half of this year, indicating that even the most prominent players in the industry are suffering from the worst slump the country’s property market has ever seen.

Edward Moya, a senior market analyst for Oanda, stated, “If Country Garden, the largest privately owned developer in China, fails, it could trigger a confidence crisis in the real estate sector.”

Increasing strain

Since last week, Country Garden’s stock has lost more than 30 percent of its value after the company warned of an unaudited net loss for the year’s first half.

“The company will actively consider taking various countermeasures to ensure the security of cash flow,” stated in a 31 July filing with the exchange. “Meanwhile, it will actively seek guidance and support from government and regulatory authorities,” the statement continued.

The following day, it was reported that an endeavor to raise $300 million by selling new shares had been canceled.

Moody’s downgraded Country Garden’s credit rating to B1 on August 3, indicating that its debt is “high risk.”

“The downgrade reflects our expectation that Country Garden’s credit metrics and liquidity buffer will weaken over the next 12 to 18 months due to its declining contracted sales, still-restricted funding access, and large maturing debt,” said Kaven Tsang, a senior vice president at Moody’s.

The property crisis worsens.

China’s real estate industry has been embroiled in a historic downturn in the past two years. As a result of the now-defunct Covid curbs, falling home prices, and increasing unemployment, households have become reluctant to purchase new homes.

A series of significant defaults by real estate titans in 2021 undermined the sector’s confidence and led to homebuyers paying for apartments they never received, sparking rare demonstrations.

According to industry data released last week, the 100 largest developers in China reported a 33% decline in new home sales in July compared to the same month the previous year, the steepest monthly decline since July 2022.

After three years of self-imposed coronavirus pandemic isolation, investors view the revitalization of the sector as vital to the economic recovery.

Recent indications from top policymakers indicate that Beijing is becoming increasingly concerned about growth and has recognized the need to strengthen the sector.

Premier Li Qiang vowed on Monday to “adjust and optimize” policies to ensure the healthy and stable development of the property market, and he urged cities to implement measures tailored to their specific requirements.

Last month, the People’s Bank of China announced that it would grant developers an additional year to repay outstanding loans due this year.

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