Country Garden validates concerns over China’s real estate market, reinforcing worst-case scenarios

**China’s Country Garden Holdings Faces Default on Bonds Amid Property Slump**

China’s property market is facing a major setback as one of its largest developers, Country Garden Holdings Co., struggles to avoid defaulting on its bonds. The company, which had total liabilities of 1.4 trillion yuan ($194 billion) at the end of last year, underestimated the market downturn and is now experiencing its biggest challenge since its establishment in 1992. Country Garden is expecting a net loss of up to 55 billion yuan for the first half of 2023, compared to earnings of 1.91 billion yuan in the previous year.

**Suspension of Trading and Liquidity Concerns**

Country Garden Real Estate Group Co Ltd. has announced that it will suspend trading in nearly a dozen onshore bonds starting Monday. This decision comes after the company’s controlling shareholder stated that it would report a multi-billion-dollar loss for the first half of this year. The liquidity crunch faced by the developer is raising concerns about the potential impact on the Chinese economy, with Bloomberg’s index of the country’s junk dollar bonds falling to its lowest level since last year.

**Investors’ Concerns about China’s Property Market**

The latest announcement by Country Garden has confirmed investors’ worst fears about the state of China’s struggling property market. This adds to worries about the industry’s effect on the country’s economic growth. Various measures by regulators to revive demand in the real estate sector, such as easing mortgage rates on first-home purchases, have not been effective. In fact, home sales experienced the sharpest decline in a year in July.

**The Vicious Cycle of the Property Sector**

The property sector’s downturn has created a vicious cycle. An earlier government campaign to reduce developers’ leverage caused housing purchases to decline, which in turn affected builders’ cash flow and led to a record number of defaults. The situation became so dire that protests erupted across cities as developers ran out of funds to complete and deliver apartments to buyers. The Communist Party intervened and promised further easing of property measures, but persistent defaults among developers could further dampen homebuyer confidence.

**Bondholder Concerns and Economic Weakness**

Bondholders of two dollar notes issued by Country Garden did not receive coupon payments due on August 7. This further adds to the turmoil in the market. Additionally, signs of weakening economic demand are emerging as hopes of a rapid recovery following the rollback of pandemic measures fade away. Consumer and producer prices fell in July compared to the previous year. While the statistics bureau believes this is a temporary contraction, the failure of another major Chinese developer could put tremendous pressure on the already slowing economy.

**The Need for Timely Policy Support**

Regulators in China have been working to revive the property sector, which makes up about a fifth of the country’s GDP, and stabilize the market. Despite positive policy signals, the sector requires more tangible and timely policy support to ensure stability. The economic recovery from the reopening after the COVID-19 pandemic mainly depends on consumption, making it crucial to rescue the real estate sector. Another major developer’s failure would further weigh down the already slowing economy.

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