Massive Losses Expected by Country Garden Signals Looming Property Market Woes in China

The Lede: Country Garden, one of China's biggest property developers, warned on Thursday that it expected a loss of up to $7.6 billion over the first six months of this year as the country faces an increasingly worrisome economic outlook.

What We Know:

• Country Garden shares fell by 8.7% in Hong Kong Friday following the company’s warning of potentially massive losses in the first half of the year and a report from Chinese news outlet Yicai that the firm is preparing to undergo debt restructuring. The property developer attributed the expected loss to a series of problems including falling property sales and lower profit margins.
• Additionally, the company reportedly missed two coupon payments on dollar bonds that were due Sunday. News of the missed payments led to the company being downgraded by rating firms. Moody’s reduced its credit rating from B1 to a Caa1 on Thursday, which signals “very high risk” in holding Country Garden’s debt.
• Chairwoman and controlling shareholder Yang Hulyan has seen a massive drop in her fortune recently, falling 84% since June 2021, or $28.6 billion. This represents the biggest wealth drop of any billionaire in the world over the past two years. Yang will head a company task force that will be tackling its troubled state of affairs.

The Background: Country Garden has been one of the biggest and most reputable home builders in China, constructing hundreds of thousands of homes annually across the country. In the past several years, Chinese property developers accumulated substantial debt to engage in urban development. It was common for them to sell apartments before they were completed. This propelled their top executives to the ranks of some of Asia’s richest business people. The failure of the Chinese developer Evergrande in 2021 was part of a larger loss of confidence in the country’s real estate sector as millions of people were left with unfinished apartments. New home sales by China’s 100 biggest developers dropped by 33% in July from a year ago. The property sector accounts for about one third of the Chinese economy.

Likely Outcomes:

• Country Garden will likely face problems in servicing its debt obligations. Restructuring will probably be required as well as potential asset sales. A default would deal a massive blow to the already low confidence in the Chinese property market. Those who would have invested in the sector in the past will either trend toward saving more in cash or considering alternative investments. This would be a deep shift in the investment landscape in China and sentiments point to this path already taking shape.
• In the last several years, the Chinese government has attempted to curb debt-fueled speculation in the country’s real estate market. It remains to be seen whether the state will increase intervention in the sector, but the country may not be able to bring it under control. That would deal another blow to the already faltering economy that is facing slow growth, deflation, loss of exports, and high youth unemployment. This further dims the remaining hopes in the global economy for a turnaround from China’s reopening from earlier this year.

Quotables:

“In view of its deteriorated liquidity and financial flexibility, sizable refinancing needs and still-constrained access to funding. The negative outlook reflects the uncertainty over Country Garden’s ability to service its debt obligations, including coupon payments, in a timely manner over the next [six to] 12 months.” – Kaven Tsang, a Moody’s senior vice president

“Right now people are reassessing what in the future will be a good investment. Since the beginning of last year, people are starting to realize real estate prices are not going up. I don’t think it’s the lack of confidence. For many people they still have money in the bank.” – Liqian Ren, leader of quantitative investment at WisdomTree

“These real estate tycoons are making a lot of money, but the company is in a mess, the money goes into their pockets and the mess is the government’s. Systemic problems, ordinary people pay the bill.” – Sun Guoyu, chairman of Shenzhen Neteye Holdings

“The global economy is losing one of its engines of growth. That’s why everyone should care about what is happening to real estate. Real estate is the main drag right now on confidence levels, on demand, and on industrial productivity.” – Alfredo Montufar-Helu, head of the China Center for Economics and Business

Good Reads:

China’s real estate market roiled by default fears again, as Country Garden spooks investors (CNBC)

China property giant Country Garden warns of up to $7.6bn loss (BBC)

Chinese property giant Country Garden warns of $7.6 billion loss as it nears default (CNN)

Outrage Online as Chinese Property Giant Wobbles and Stock Dives (NYT)