China’s Property Giant Country Garden’s Shares Plummet as Market Implodes

China’s property sector crisis erupted again on Friday, with a significant drop in the shares and bonds of Country Garden, one of the country’s largest developers, capping a traumatic week for the long-struggling sector.

The news that the firm, which has thousands of projects in almost 300 Chinese cities, was refinancing a portion of a 2019 loan facility sent its Hong Kong-listed shares down more than 5% and left its bonds at record lows touched late last year sent its Hong Kong-listed shares down more than 5%.

“That doesn’t get them completely out of the woods,” one Country Garden bondholder, who declined to be identified, said, adding that the developer will face another round of bond payments in the following months.

Raymond Cheng, head of China research at CGS-CIMB Securities, issued a similar warning, saying it was part of a larger issue with the government’s response to the crisis.

“If sales do not improve, people will be concerned about the ability of developers with large exposure in smaller cities, such as Country Garden,” Cheng added.

“In terms of sales, Country Garden is a top developer.” If it defaults, it will send a very negative signal to the market that the central government is unconcerned about more developers failing and has no plans to bail them out.”

Property Sector on Downward Trajectory

Another week of worrying news from China’s property sector. The sector has been on a downward trajectory that has been hastened by the Covid epidemic, with home sales falling and the government attempting to reign in unsustainable borrowing accumulated during a decade-long building boom.

Other high-profile but debt-laden Chinese companies, such as Dalian Wanda Group and state-backed Sino-Ocean, have witnessed significant sell-offs this week amid a series of major rating downgrades.

Analysts at ANZ believe the worst is yet to come, with the industry facing $12.8 billion in dollar-denominated bond repayments by the end of the year.

“New measures, while beneficial, are not a panacea for the sector’s problems.” Other initiatives are required to improve buyers’ confidence in the property market’s long-term trajectory,” they noted.

Country Garden, which declined to comment on Friday’s selloff, is one of China’s largest market participants, and its problems are increasing pressure on Beijing to provide extra support to the property sector, which once accounted for almost a quarter of China’s economic output.

According to JPMorgan analysts, Country Garden’s loan refinancing was “marginally credit positive” because a major portion of the outstanding amount was rolled into a new 30-month term rather than facing immediate payback.

“That said, the onshore operating environment remains challenging for developers, especially with no indication of relaxation of escrow account supervision,” they wrote.

Other major concerns in the sector this week included Dalian Wanda Group, another of China’s most prominent conglomerates, Sino-Ocean, and the second default in less than a year by state-backed Greenland (600606.SS).

China’s former richest man

Wanda, owned by China’s former richest man Wang Jianlin, has a $400 million bond payment due on Monday at its primary property unit, Dalian Wanda Commercial Management (DWCM). Moody’s and S&P Global are both skeptical that it will make it.

Wanda was one of the few private companies to have survived the three-year property crisis. DWCM had even sold bonds earlier this year, which was considered as a positive step for the sector.

Country Garden’s bonds fell to between 17 and 21 cents on the dollar on Friday, representing about a fifth of their face value. Its onshore bonds fell by about 30% each.

“Country Garden is in serious trouble,” said Yao Yu, founder of credit analysis firm Ratingdog, adding that the company owed more than 10 billion yuan ($1.4 billion) in the next two months.

Wanda Commercial bonds, which have fallen more than 70% this year, have also fallen, leaving them worth less than a fourth of their initial face value.

According to JPMorgan, roughly $120 billion in Chinese property debt has defaulted since the crisis began in 2020.

Analysts at the bank anticipate another $9 billion in defaults this year. This excludes Country Garden, which has more than $40 billion in debt, although economists believe the government may need to provide additional support to the industry.