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Country Garden's reprieve and China's property sector: A fragile balance

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2023-09-04

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Could there be a temporary lifeline for China's largest property developer, Country Garden, and the struggling property sector as a whole?

Reports over the weekend indicate that Country Garden has secured creditor approval to extend payments for a 3.9 billion yuan ($US540 million) onshore private bond.

This development follows a tense period last week when the company sought and successfully obtained an extension to a Thursday deadline to gain creditor approval for an extension.

The voting period was extended until 10 pm on Friday night. Reuters and other media outlets reported over the weekend that creditors ultimately voted in favor of extending the repayment timeline.

Originally due on Saturday (September 2), the bond payment had been causing concerns due to Country Garden's financial difficulties, including recent defaults on other bond payments.

Friday's vote offers the company a reprieve, preventing a default and providing relief to both financial markets and the Chinese government. The government has implemented a series of measures to support the indebted property sector.

This extension grants the developer a three-year window, until 2026, to repay the debt in installments.

However, the challenges are far from over. Onshore bond payments totaling 12.6 billion yuan ($US1.7 billion) must be met by the year's end, according to the CreditSights group.

Hence, unless a more sustainable repayment agreement is reached, the debt payment issue will persist, affecting not only the company but also the wider Chinese property sector and economy.

Despite Country Garden's liabilities of approximately $US194 billion, which are only 59% of Evergrande's, the company's extensive portfolio of 3,103 projects across China makes it crucial for systemic stability. Additionally, concerns of financial stress have fueled contagion fears.

A default by Country Garden could exacerbate China's real estate crisis, potentially compelling the government to intervene in support of the company, other property groups, and even financial institutions holding substantial loans to developers.

Nevertheless, Country Garden remains in a precarious situation. The company faces upcoming dollar coupon payments on its other offshore bonds throughout the rest of 2023.

Furthermore, Moody's recently downgraded the company's credit ratings by three notches to Ca from Caa1 due to concerns that it might be on the brink of default. The agency cited tight liquidity and weak prospects for bondholders' recovery.

The ongoing crisis continues, but after last week's policy shifts by various Chinese governments, there appears to be a shift in their stance toward supporting the sector.

Chinese authorities are aggressively implementing measures to stimulate the property market and bolster the struggling economy. These measures include mortgage rate reductions and relaxing home purchase restrictions.

In an effort to slow the pace of recent yuan depreciation, China's central bank announced a reduction in the foreign exchange reserve requirement ratio (RRR) by 200 basis points to 4% from 6%, effective September 15.

The People's Bank of China had previously cut the FX reserve requirement ratio for financial institutions by 200 basis points in September 2022 to curb yuan weakening and make it more cost-effective for banks to hold dollars. This move is expected to inject around $US16 billion into bank liquidity and potentially strengthen the yuan.

While measures aimed at aiding the property sector, such as interest rate deposit cuts for first-time buyers in Beijing, Shanghai, Shenzhen, and Guangzhou, are likely to provide support for the weakened currency.

The Caixin group's second monthly survey of Chinese manufacturing indicated a slight recovery toward expansion on Friday, compared to the official activity survey for August, which showed another month of contraction.

This week presents two significant tests for the Chinese economy: trade data on Thursday and inflation figures on Saturday. Both are anticipated to remain weak for yet another month, further prompting questions about the trajectory of the country's economy.

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