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China's property woes deepen: Country Garden warns of debt woes as property crisis escalates

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2023-09-01

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As the week unfolded, China faced a series of critical challenges that reverberated through its financial and real estate sectors. The largest remaining property player, Country Garden, delivered a jolt to markets with a record first-half loss of almost $7 billion USD ($11 billion AUD) and a stark warning of its potential inability to meet its debts. This announcement comes amidst an ongoing property crisis that has sent shockwaves across the country, leaving visible dents in the finance industry.

Both Reuters and the Financial Times corroborate the escalating property crisis in China, with signs of its repercussions increasingly affecting various segments of the finance sector, including investment groups, shadow banks, and traditional banks. However, this unsettling news didn't immediately impact Chinese shares, which remained solid until recently, when they began trading lower.

While it's tempting to attribute this downward shift to the property turmoil, other factors also played into the market movement. One significant development is the news that a major Chinese city has taken steps to ease rules on property purchases, a move that could potentially boost the market if adopted nationwide.

Amidst these dynamics, China's recent activity survey for August provided mixed signals to investors. The country's manufacturing activity, as indicated by a reading of 49.7, inched closer to the neutral level of 50 after five consecutive months of weakness. Conversely, the non-manufacturing survey posted a slightly weaker reading of 51, down from 51.5 the previous month. When combined, these indicators yielded a reading of 51.3, a marginal improvement from July's 51.3.

The spotlight, however, remained on Country Garden, which holds the unenviable distinction of being the largest private property group after the fall of China Evergrande. The company revealed a massive first-half loss of nearly $7 billion USD and issued a sobering warning about its debt obligations, hinting at potential defaults if its financial performance continues to deteriorate. Country Garden acknowledged being caught off guard by the extent of the real estate market slump, particularly in smaller Chinese cities, leaving the company struggling to respond effectively.

The company's financial woes include missing interest payments on some of its bonds and the possibility of further defaults if its situation worsens. Country Garden's staggering $200 billion USD in total liabilities further adds to the pressure of meeting debt obligations.

As China grapples with these financial and real estate challenges, it seems that even the optics of a major global meeting might be too much to bear. Reports suggest that President Xi Jinping is contemplating skipping the upcoming Group of 20 (G20) leaders meeting in India, potentially to avoid a stark comparison with India's booming economy and its assertive Prime Minister Narendra Modi.

The contrast between China's property crisis and India's flourishing economic landscape underscores the depth of China's challenges and the uphill battle it faces in restoring stability and confidence in its financial and real estate sectors.

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