Country Garden is the latest Chinese real estate company to run into trouble

Remember China Evergrande, the Chinese real estate behemoth that sent world markets spinning in 2021? Its collapse marks the start of a crisis for China’s housing market, where apartment sales have stalled and developers big and small have been unable to pay their bills.

Now, the financial woes of another real estate firm, Country Garden, are raising new concerns. They are a flashing warning sign about China’s economy.

Country Garden, the nation’s largest developer by sales, has hit markets twice in the past week. Investors are alarmed by two events: On August 1, the company Removed A plan for cash flow in business is something it needs. This week, it missed two interest payments on bonds. Bonds payable in US dollars are of relatively small value, but defaulting on them exposes the company to default risk.

The country estate’s market value has halved since the start of the year. Traders traded some of its bonds for 10 cents on the dollar this week, a sign of skepticism that they expect a full repayment.

Investors are concerned that Country Garden has benefited greatly from measures to boost the real estate market last year, including more financial support. For some time, the Chinese authorities appointed it as a prototype developer. This made lending to the company more palatable when many Chinese developers were in trouble.

But recent events have plunged the country garden into a state of misery unthinkable a year ago. was doing Nearly $50 billion in sales. The worry now is that even if Beijing promises more support for the real estate market, the measures may not be enough.

Much of Country Garden’s financial position has come from falling sales of its apartments. Few people are interested in buying a house in China. The company released A Profit alert In July, it said it may have lost money in the first half of the year due to a „downward trend in real estate sales.”

Country Garden is facing a cash crunch as Chinese leaders try to revive it while the real estate sector is in shambles. There was some hope in July when the government’s top decision-makers pledged policies to help. Much of the initiative is in the country’s big cities, such as Shenzhen and Shanghai, and these measures are unlikely to benefit Country Garden, which operates more in smaller cities.

The two bond filings that Country Garden missed this week don’t have much money for the company, which also has a 30-day grace period. But a default has scared off lenders in the past. The company did not respond to a request for comment.

As Sandra Chow, co-head of Asia-Pacific research at CreditSights, said: „Developers’ struggle to address even a modest coupon payment underscores the extent of its cash crunch.”

More broadly, Country Garden’s potential default is another ominous sign for China’s economic outlook as its leaders look to restart the economy after three years of strict Covid-19 measures that have suppressed activity. Home sales have slowed in the first half of the year, and have been on the decline Accelerated last month. One in five Chinese youth is unemployed. People don’t spend money, leading companies cut prices. In smaller towns like Country Garden, which continues to build its sprawling housing complexes, officials face housing overcrowding and a steady decline in population.

Nervous investors will further accentuate Country Garden’s financial pressures. The company is worse off than the broader market and developers who focus on big cities, where the real estate recession is not as severe. Country Garden’s sales under contract fell by nearly a third in the first six months of the year.

Even if Country Garden manages to pay interest on these bonds in the coming weeks, it’s not out of the woods. According to Moody’s, it will have to make bond payments every month throughout the year, including $2.4 billion in bonds owed to investors in China and $2 billion in bonds to foreign investors by the end of 2024.

The prognosis is not great. Investors fear contagion from Country Garden’s deepening problems. Shellshock lenders who have consistently lent money to developers may think twice before giving them more money. Homebuyers may shy away from a company on the cusp of a recession. They have seen this movie before.