Commentary on Political Economy

Saturday 12 August 2023


Coun­try Garden: the blight of mourn­ing

When China’s largest developer says it is strug­gling to see “dawn light”, it is not just the Chinese who should feel wor­ried. Coun­try Garden, China’s biggest developer by 2022 sales, warned yes­ter­day that its first-half loss could reach $7.6bn.

This week it con­firmed it had missed interest pay­ments on two bonds. For two dec­ades, China’s highly lever­aged prop­erty sec­tor has defied pre­dic­tions of an implo­sion. The prob­lems of Coun­try Garden, pre­vi­ously seen as among the safest large developers, show that implo­sion is gath­er­ing pace.

The shares hit a his­toric HK$0.98 low yes­ter­day, down 64 per cent this year. One of its dol­lar bonds, due in Janu­ary, has fallen below 9 cents on the dol­lar this week, says Bloomberg data. Moody’s has down­graded the busi­ness to Caa1, deep into “junk” ter­rit­ory.

Coun­try Garden has a 30-day grace period for this week’s missed pay­ments. But next month, more than $1.2bn in new pay­ments come due. It has $10bn in dol­lar bonds out­stand­ing and had more than $190bn in total liab­il­it­ies at the end of last year. This had looked man­age­able when asset prices were stronger. No longer.

It is two years since the infam­ously risky China Ever­grande Group defaul­ted. The strain on Coun­try Garden is occur­ring des­pite frantic offi­cial efforts to stem con­ta­gion.

The rapid deteri­or­a­tion of this strong name deals a heavy blow to investor con­fid­ence. Des­pite aggress­ive policy eas­ing, prop­erty sales fell 28 per cent in June, the fast­est pace this year. Unless local home­buy­ers return to the mar­ket en masse, worse will fol­low.

Beijing is under pres­sure to speed through its stim­u­lus pack­ages to back up the eco­nomy. Prop­erty accounts for nearly a quarter of China’s GDP.

Investors should stay out of Chinese prop­erty. Would-be bot­tom fish­ers are angling over a poten­tial abyss. The ques­tion is not whether con­ta­gion will spread, but how far within the Chinese eco­nomy and bey­ond it.

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