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Hong Kong shares slide as crisis deepens for Chinese property developer country garden

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2023-08-15

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A new crisis enveloped the beleaguered Chinese property developer, Country Garden, leading to a sell-off in Hong Kong shares on Monday. Additionally, reports spread about a major asset manager allowing defaults to occur on fixed interest products.

From the market's reaction on Monday, it appears that investors have lost faith in Country Garden. The crisis surrounding the developer intensified when the company surprised investors by announcing the suspension of trading in 11 of its bonds on the Shenzhen Stock Exchange from Monday, August 14.

The shares slumped 16%, trading at a new low of 79 Hong Kong cents on the Hong Kong Stock Exchange on Monday, down from 94 Hong Kong cents on Friday. This drop came after investors grappled with news of a potential half-year loss of up to $7.6 billion by June 30. The shares ended around 83 Hong Kong cents.

At 83 Hong Kong cents each, Country Garden still has a value of $23 billion Hong Kong dollars (approximately $2.9 billion USD), but it carries debts of around $200 billion USD, placing it in an unenviable situation.

According to filings to the Shenzhen Stock Exchange over the weekend, the company did not provide a date for the resumption of trading; instead, it stated that the date would be determined later.

The news about Country Garden emerged alongside an earlier revelation that one of China’s largest private wealth managers had missed payments on multiple high-yield products traded off the market.

Chinese firms disclosed over the weekend that they had not received payments on four fixed interest products issued by companies associated with Zhongzhi Enterprise Group, which is reported to have around $213 billion USD in assets.

In an article, Caixin magazine described Zhongzhi Enterprise Group as "the latest Chinese financial holding group to fall."

Adding to the concerns stemming from Country Garden's news, investors in Hong Kong had an apprehensive Monday. However, it appears to have been less stressful in mainland equity markets, where the declines were less than 15% towards the close.

The suspension of bond trading by Country Garden was not explained and occurred at the end of a significant week for the struggling property giant. A week prior, Country Garden had announced that it had not paid two US dollar bond coupons due on August 6, totaling $22.5 million USD, confirming market fears that the developer was facing a cash shortage.

Moody’s promptly downgraded its rating to deep junk level and close to default.

With liabilities surpassing $200 billion USD, according to some analysts, the developer's Thursday warning of a potential first-half loss of up to $7.6 billion added to the sense of crisis. This was accompanied by an apology, though that proved ineffective for investors seeking to escape the looming collapse.

According to the weekend statement, Country Garden plans to communicate with all shareholders and consider various debt management measures to protect the legitimate rights and interests of investors.

The group states that it will continue to develop risk solution measures and business strategies in the future to ensure the group's long-term development.

The company has formed a special working group led by the chairman of the board of directors, as well as a mechanism to coordinate efforts and facilitate effective decision-making to navigate this challenging period.

On Monday, Moody’s analysts cautioned, "As one of the largest real estate developers in China, its credit distress is likely to spill into the country's property and financial markets. Specifically, it is likely to weaken market sentiment and delay the recovery of the Chinese property sector."

"As a major developer, Country Garden’s financial stress could raise concerns among homebuyers about the financial health and project completion capabilities of other developers, particularly privately owned and smaller companies.

"This could drive potential homebuyers away from privately owned developers, and even from the property markets in the near term. Homebuyers’ reluctance toward the sector could also diminish the effects of potential government measures aimed at stabilising property sales,” Moody’s cautioned.

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