Another Chinese property giant is teetering on the brink

China’s largest property developer, Country Garden, has been missing interest payments on its debts and only last week warned that it might default on them. The moment of reckoning, or at least one of those moments, arises this week.

Country Garden didn’t make an interest payment on a $US15.4 million ($24.3 million) bond when it fell due last month, but had a 30-day grace period to make good on the obligation. That period expires on Wednesday, pushing the group to the brink of a default.

Residents on a tricycle ride past a car with a sign that reads “Country Garden homeowners rights protections car”, parked near homeowners camping outside the Country Garden One World City project on the outskirts of Beijing.Credit: AP

Last week, the company said it had been unable to repay another $US60 million loan that had fallen due, and that it didn’t expect to be able to meet all its US-dollar bond and other offshore debt obligations within their grace periods. It has more than $US170 million of interest payments on its dollar bonds due before the end of this year.

With $US187 billion of total liabilities, including about $US11 billion of offshore bonds, Country Garden is carrying nowhere near as much debt as the other major developer on the brink of collapse, China Evergrande, which has about $US335 billion in liabilities. But Country Garden has about four times as many projects under development. It is by far China’s biggest developer.

If it were to default on its 3000 or more projects, mainly in regional areas, it would cause China’s authorities and economy even bigger headaches than Evergrande, which faces a potential liquidation order in the Hong Kong courts on October 30.

China’s housing sector is deeply distressed. Country Garden, for instance, experienced an 81 per cent plunge in its home sales last financial year. That distress in a sector that had historically generated more than 30 per cent of China’s GDP is weighing on an economy that may struggle to meet its official growth target of about 5 per cent this year.

The state of the sector creates real challenges for the authorities, with prospective owners of the incomplete properties indebted and angry (China’s developers use a pre-sales model) and the banks that have funded the developers and granted home loans experiencing increasing losses.

China’s authorities, who triggered the crisis by imposing Xi Jinping’s “three red lines” policy, which set hard limits on developers’ leverage, have done what they can to help them now by loosening credit criteria and lowering mortgage interest rates to try to boost demand for property.

With Evergrande within days of some form of liquidation order and Country Garden tracking down the same path, they are about to be confronted with a new and messy phase of the real estate crisis, given the sheer size and complexity of the two property giants and the impact that their liquidation might have on an already oversupplied and depressed market.

An Evergrande and/or Country Garden collapse, even with an orderly and government-controlled process, would weigh on the property market and China’s economy for years, if not decades.

Given that most of the projects are within China, the Beijing authorities might well ignore whatever the Hong Kong court orders, perhaps taking control of the wind-up of Evergrande’s onshore assets themselves and leaving the offshore creditors effectively wiped out.

It is unlikely that the authorities will countenance anything but an orderly winding down of developers like Evergrande and Country Garden, hoping that time will help reduce the impact of their failures.

But an Evergrande and/or Country Garden collapse, even with an orderly and government-controlled process, would weigh on the property market and China’s economy for years, if not decades.

The property market distress is also infecting other elements of the economy. It appears to be a factor in depressing consumer confidence and consumption, and the confidence and wealth effects might also have spread to the sharemarket, which is now down nearly 14 per cent since the start of February.

That seems to have unsettled the authorities. China’s sovereign wealth fund has been buying bank stocks for the first time in eight years, new restrictions on short selling were imposed this month and there are reports that Beijing is contemplating creating a state-funded sharemarket stabilisation fund to prop up the market.

With the economy flirting with stagnation – last month’s consumer price inflation reading was zero and producers’ price inflation was minus 2.5 per cent – the People’s Bank of China has been injecting cash and liquidity into the financial system. There are also reports that Beijing is considering widening its planned 3 per cent budget deficit with borrowings to fund a significant new infrastructure investment program.

The authorities have, until now, held off resorting to their traditional response to an economic slowdown – infrastructure spending has been at the head of the list – because of the levels of debt within the economy and also the unproductive nature of much of the past spending.

They’ve also tightened their supervision of smaller banks, particularly the regional banks most exposed to the worst of the property downturn (and to Country Garden’s developments), and are helping those banks clean up their balance sheets by shedding non-performing loans and injecting new capital.

Local governments, traditionally reliant on property sales to developers for much of their revenue, have also been given help to recapitalise their off-balance sheet finance vehicles.

There are no signs of panic emanating from Beijing, but there’s a developing sense of urgency as the authorities try to generate the confidence and consumption needed to sustain even the modest (by China’s standards) growth rates they are now targeting.

It will be difficult in the face of the headwinds provided by the property market’s implosion, the developers’ distress and Chinese households’ caution.

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