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Country Garden’s Great Wall of Debt won’t collapse tomorrow. China’s largest private developer has bought itself some time to pay off more than half a billion dollars in domestic bonds after reaching an extension agreement with creditors this past week.
While it’s a much-needed reprieve for both Country Garden and the rest of China’s ailing property sector, plenty of headwinds are approaching, The Wall Street Journal reported.
China’s property sector was long viewed as one of the nation’s best money-making sources, propped up by a rapidly urbanizing population. It created jobs, strengthened middle-class wealth, and benefited local tax revenues. But just like the US in the mid-2000s, cracks have appeared. The country’s population is decreasing, poor performance throughout the rest of the economy has shrunk the pool of new home buyers, and Beijing’s heavy-handed regulations have left developers with tons of debt and empty units. A Country Garden debt default would send destructive ripples throughout the industry.
Fortunately, it won approval from local creditors last week for a three-year extension on one type of debt, delaying repayments on $540 million in maturing bonds. On Monday, the company’s stock jumped 15%. Additionally, Chinese authorities announced new policies for a dozen of the country’s largest cities that will reduce down payments for homebuyers and encourage lenders to cut interest rates for existing mortgages. The news caused the Heng Seng Property index to jump 8% Monday, and saw share prices for developers China Resources Land and Longfor Group increase 10% and 8%, respectively.
But the rally may not have a lot more fuel:
- Country Garden’s share price is still down nearly 70% this year, and it posted a $7 billion loss in the first half of 2023. In August, the company sold homes valued at a combined total of around $1.1 billion, a drop of roughly 75% from a year ago.
- Its grace period to pay off $22.5 million in coupon payments on bonds with a total face value of $1 billion ends this week. Even if it doesn’t default on that one, the company has $15 billion in bonds, bank debt, and other borrowings due within a year.
At-home Security: What’s worse for the property crisis is that stimulating China’s struggling economy doesn’t seem to be as important to President Xi Jinping as national security concerns. In May, Bloomberg columnist Minxin Pei wrote, “Aware that China’s leaders are unlikely to prioritize economic growth, private investors have held back. Official data show that private investment has risen only 0.4% in 2023. As China’s private sector accounts for 60% of GDP, those numbers spell long-term trouble.” Plus, with continual crackdowns on foreign businesses, many are finding it increasingly difficult to thrive, let alone survive, in China.