China’s largest private real estate developer, Country Garden, is facing financial difficulties as it seeks to delay payment on a private onshore bond for the first time. This move highlights the cash crunch in the property sector and adds to concerns about contagion risk in the market. Another major Chinese trust company, Zhongrong International Trust, has also missed repayment obligations on some investment products.
Analysts are warning that increasing default rates by shadow banks, which have ties to the property sector, will weigh on China’s economy. The real estate sector in China has been experiencing tumbling sales, tight liquidity, and developer defaults since late 2021, with Evergrande Group at the center of the debt crisis. Weaker overseas demand, tepid domestic consumption, and persistent problems in the property sector are major factors in China’s struggle to recover from the COVID-19 pandemic.
Country Garden’s difficulties could have a chilling effect on homebuyers and financial firms, with other private developers also at risk if Beijing does not provide support. Trust firms, or shadow banks, operate outside the regulations that govern traditional banks and often provide funding to developers and other sectors. JPMorgan predicts that rising trust defaults will drag down China’s economic growth by 0.3-0.4 percentage points.
Concerns about the exposure of China’s shadow banking industry to property developers have grown in the past year. Country Garden has proposed to creditors to extend repayment for an onshore bond by three years in seven installments, totaling 3.9 billion yuan ($558 million). The developer has suspended trading in 11 onshore bonds and missed payments of two dollar bond coupons, signaling potential debt restructuring.
As a result, Country Garden’s shares have dropped by 18.4% and the Hang Seng Mainland Properties Index has fallen by 3.7%. The company’s offshore bonds have also seen a decline in value, raising concerns about the wider property market. Experts in the industry believe that the property sector’s impact on the Chinese economy is reaching a “critical moment” and urge regulators to implement policies such as further interest rate cuts and reserve ratio reductions.
The weak demand in the property sector has affected the wealth effect among investors and has dampened interest in buying property. China’s economy grew at a frail pace in the second quarter, leading analysts to downgrade their growth forecasts for the year. State-owned company China Jinmao expects an 80% decline in net profit for the first half of the year due to a drop in gross profit margin and a decrease in land development revenue.
All eyes are now on how China’s regulators will respond to the challenges facing the property sector. The outcome will not only impact Country Garden’s future but also have far-reaching implications for the overall Chinese economy.
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