Latest China developer debt woes could spur policy aid, but industry downbeat

By Clare Jim

HONG KONG (Reuters) -News that big developer Country Garden was not able to make $22 million in bond payments is an alarm call for China’s government that more private property companies are close to a tipping point if financial support doesn’t materialise soon.

As Country Garden was the largest developer in the country before this year, industry executives and analysts told Reuters its missed payments this week could prod regulators into rolling out stronger aid measures, but they had little faith such steps would turn the debt-laden sector around any time soon.

Country Garden told Reuters on Tuesday it was not able to make $22.5 million in coupon payments due on Aug. 6 on two, dollar-denominated bonds, though both have 30-day grace periods.

China’s property sector, which accounts for a quarter of the economy, has already seen a string of debt defaults by cash-squeezed developers since late 2021, with China Evergrande Group, the world’s most indebted property developer, at the centre of the crisis.

Contagion fears in the market re-surfaced last month when four high-profile developers signalled liquidity stress amid slumping home sales nation-wide.

Problems are even spreading at state-backed developers, which are seen as having better access to cheap funding and are more likely to benefit from government support.

State-backed Sino-Ocean Group is seeking to extend some offshore bond payments, while Greenland Holdings defaulted on an amortization payment.

A unit of Dalian Wanda Group, the largest commercial property developer in the country, has also missed a dollar coupon payment, though Greenland and the Dalian Wanda unit managed to make the payments later, avoiding official defaults.

Country Garden’s missed payments have triggered a sell-off in shares and bonds across the sector and fears of more contagion, analysts at HSBC said in a research note.

“However, we caution that it’s possible this accelerates the roll out of a policy package to support the housing market.”

China’s Politburo, a top decision-making body of the ruling Communist Party, pledged in late July to adjust property policies in a timely manner, while omitting the often-repeated phrase used by officials that “houses are for living in, not for speculation”, fuelling speculation more stimulus was on the way.


In its statement on Tuesday, Country Garden said “it’s hard to see the dawn light”, with its usable cash having declined and showing “periodic liquidity stress” due to a deterioration in sales, a difficult refinancing environment and the impact of various regulations on funding sources.

While some market participants are hoping Country Garden could make the latest coupon payments within the grace period, its massive upcoming bond payment schedule will still be a huge hurdle to overcome.

In September alone, Country Garden has a 5.8 billion yuan ($804.72 million) onshore bond maturing and a 48 million yuan coupon due, as well as put options on a further 3.4 billion yuan of paper.

Offshore, it has coupon payments totalling $58 million due next month, according to JP Morgan.

The investment bank said Country Garden’s home sales could slump more than 80% in the rest of this year compared to the four-year average, as reports of financial distress scare away potential homebuyers.

“Arguably, the (Country Garden) contagion impact will be not as big as when Evergrande defaulted, because 40% of the market by 2021 sales has already defaulted,” JP Morgan analysts said in a research report.

Executives of developers, both healthier ones and some of those who have defaulted, told Reuters a default by Country Garden would have limited impact on the wider sector, as bank lending and liquidity are already very tight.

One executive, however, is worried homebuyers would steer clear of private developers and local governments might tighten their access to funding even further to ensure they complete homes that have already been sold. The executive declined to be identified because he was not authorized to speak to media.

Reuters reported last week that some cities have made it harder for developers to access funds from property sales held in escrow accounts, raising risks the cash-strapped companies will be squeezed even more.

Reviving home sales is key to a recovery, developers said, but buyer sentiment is at the lowest level they have ever seen due to the poor outlook for both the sector and the broader economy, which tipped into deflation in July.

With fewer visitors to showrooms, the developers expected sales would remain weak in August and September.

“There is oversupply and inventories, we need to digest such inventories,” said a policy adviser, who declined to be identified as he was not authorized to speak to the media. “It’s difficult given that the population structure has changed and people are unwilling to buy homes after the COVID (pandemic).”

Morgan Stanley analyst Stephen Cheung said in a note that Country Garden’s sales are unlikely to show meaningful improvement in the near term even with policy easing, given weak consumer confidence and the company’s large exposure to less popular low-tier cities.

Country Garden declined to comment on the investment bank reports.

JP Morgan noted that if Country Garden still defaulted after policies aiming at boosting liquidity for developers, it would show that “there is no guarantee of survival”.

“This raises the question of whether government support will ever be sufficient to prevent another large-scale default.”

($1 = 7.2075 Chinese yuan renminbi)

(Reporting by Clare Jim; Additional reporting by Kevin Yao in Beijing; Editing by Kim Coghill)