Commentary on Political Economy

Tuesday 10 October 2023


Coun­try Garden: blight house

The prop­erty developer is China’s largest by far. It has about 3,000 devel­op­ments spread across most regions of the coun­try. With debt default immin­ent, shares and bond prices are head­ing for zero, adding to the trend for off­shore bond defaults in recent years.

China’s largest private developer has con­firmed what investors had been dread­ing. Coun­try Garden is headed towards a default and has hired legal advisers to help it deal with the con­sequences. Now, it is not just China’s house­hold wealth and jobs that are at stake. Shock­waves from the Chinese real estate crisis will ripple through Asian mar­kets.

Coun­try Garden is unable to pay $60mn that is com­ing due. Grace peri­ods for the pay­ments run out in the com­ing weeks. The developer has about $200bn in liab­il­it­ies. About $10bn is dol­lar-denom­in­ated debt.

As a res­ult, any restruc­tur­ing would be of a his­toric size. There is little hope this would make much dif­fer­ence for cred­it­ors. Coun­try Garden’s dol­lar bonds trade at about 5 cents on the dol­lar. That is in line with what cred­it­ors of other defaul­ted peers are expec­ted to receive in the case of liquid­a­tion. Coun­try Garden shares have become a penny stock after fall­ing almost three-quar­ters this year.

Investors are haunted by memor­ies of the 2021 fal­lout in Asia’s high-yield bond mar­kets and equit­ies that fol­lowed a default by Ever­grande. The hit this time would be much lar­ger. Coun­try Garden has four times the num­ber of hous­ing projects as Ever­grande.

The busi­ness, unlike Ever­grande, was once seen as a safe bet on China’s prop­erty sec­tor. Its solid bal­ance sheet attrac­ted a much wider range of investors, includ­ing for­eign­ers.

They have already lost heav­ily on their invest­ment. The wider eco­nomic dam­age from Coun­try Garden will take longer to emerge.

Coun­try Garden’s Septem­ber sales volumes fell 81 per cent. Mar­ket prices are still nowhere near the bot­tom. Aggress­ive policy eas­ing has not ral­lied plunging sales. As much as 80 per cent of all China’s house­hold wealth is tied up in prop­erty.

Net house­hold wealth fell by the largest meas­ure in two dec­ades last year. A lot of sav­ings are frozen in a fall­ing, illi­quid mar­ket. As a res­ult, many Chinese prop­erty own­ers will feel poorer and con­sume less. That would fuel the coun­try’s eco­nomic slow­down, put­ting the brakes on equity val­ues across the board.

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