China’s Largest Property Developer Faces New Turbulence


China’s property sector crisis escalated again on Friday as a sharp fall in the shares and bonds of one of the country’s most prominent developers, Country Garden (2007.HK), capped a turbulent week for the long-troubled sector. News that the firm, which has thousands of projects in nearly 300 Chinese cities, had moved to refinance part of a 2019 loan facility sent its Hong Kong-listed shares down more than 5% and left its bonds close to record lows hit late last year.

Often referred to as a “model student” in China’s real estate sector, Country Garden was one of the few large private developers that have avoided default amid a broader crackdown on lending to the industry and weakening home sales this year. But the developer sank into crisis this week when it reported second-half contracted sales had plunged by almost 40 percent, putting its ability to repay debt on time in doubt.

That prompted Country Garden to announce an attempt to raise HK$3.9 billion ($500 million) by selling convertible bonds, which investors saw as a bid to flex its financial muscle as a deadline for repayment of dollar-denominated bond payments draws nearer. The company said it would use the proceeds from the bond sale to finance short-term borrowings, enabling it to roll over maturing debt and maintain adequate liquidity.

But that was not enough to reassure investors, with Country Garden’s shares down a further 8.9% and its dollar bonds falling to their lowest level in eight months. Its yuan bonds, which are due to mature in November, also slumped.

JPMorgan analysts said Country Garden’s move to refinance its debt was “marginally credit positive” as a part of the outstanding amount is being rolled into a new 30-month term instead of facing immediate repayment. But they warned that the onshore operating environment for developers remains challenging, especially with no sign of relaxation on escrow account supervision.

ANZ strategists said the turmoil in Country Garden highlighted how bad the crisis has become for China’s property sector, which had been a critical driver of economic growth until a government crackdown and a collapse in home sales battered it. They estimate the sector has lost $12.8 billion worth of market capitalization since the beginning of this year and warned that the worst may still be to come.

Chinese authorities are making their most extensive effort yet to end the crisis in the sector, which accounts for about 25% of the country’s economic output. On Friday, Beijing unveiled a 16-point plan to ease a tightening on lending and to support home sales. The measures include allowing banks to extend developer loan terms, cutting mortgage rates, and boosting other funding channels, including bond issues. Analysts said the moves were a welcome move, but they may be too little too late. They warned that many developers are already well into the red, and a reversal in home sales will push some to the brink of default.


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