The company logo of Chinese developer Country Garden is pictured at the Shanghai Country Garden Center in Shanghai, China August 9, 2023. REUTERS/Aly Song/File Photo
HONG KONG/BEIJING — China’s largest private property developer, Country Garden, is seeking to delay payment of a private onshore bond for the first time, the latest sign of a stifling cash crunch in the property sector, putting pressure on on Beijing to intervene.
Adding to concerns about contagion risk, a large Chinese trust company that traditionally had significant exposure to real estate, Zhongrong International Trust Co, defaulted on repayment obligations on certain investment products.
Analysts have warned that a rise in defaults by trust companies, also known as shadow banks, which have close ties to the domestic property sector, will further strain the world’s second-largest economy.
Anxiety over contagion risks spreads across the world walks, putting the Chinese government under increasing pressure to provide support to the struggling real estate sector, which accounts for about a quarter of the economy.
Once seen as a more financially sound developer, Country Garden’s woes could also have a chilling effect on homebuyers and financial firms, with more private developers close to a tipping point if support from Beijing does not materialize. not soon.
READ: Country Garden restructuring fears heighten China real estate concerns
The real estate sector has suffered from plummeting sales, tight liquidity and a series of development defaults since late 2021, with China Evergrande Group at the center of the debt crisis.
Weak foreign demand, sluggish domestic consumption and ongoing problems in the real estate sector have been major factors in China’s struggles to stage a strong post-COVID recovery.
READ: China’s economy slows in May, firming case for more support
In a move that dealt another blow to investor sentiment, two Chinese listed companies said over the weekend that they had not received payment on maturing investment products from Zhongrong International. Trust Co.
Trust companies, or shadow banks, operate outside of many of the rules that govern banks, channeling the proceeds of wealth products sold by banks to developers and other sectors that are unable to exploit bank financing directly.
Concerns over the outsized exposure of China’s shadow banks – a $3 trillion industry, roughly the size of the UK economy – to property developers have risen over the past year as the sector moved from one crisis to another.
JPMorgan, in a research note released on Monday, said that rising confidence defaults will directly lower China’s economic growth by 0.3 to 0.4 percentage points, and that it expects a “vicious circle” of real estate financing problems.
“In addition to the apparent financial risks and their transmissions, the latest wave of defaults by wealth management firms on trust-related products is likely to cause substantial ripple effects for the wider economy through wealth effects,” Nomura said in a separate note.
‘Critical Moment’
A source with direct knowledge said on Monday that Country Garden had offered creditors to extend repayment of an onshore private bond due Sept. 2, outstanding at 3.9 billion yuan, for three years in seven installments.
Country Garden declined to comment. In separate documents over the weekend, the developer said it would suspend trading in 11 of its onshore bonds from Monday, a move traders typically flag plans to seek redemption extensions.
In September alone, Country Garden may have to repay more than 9 billion yuan ($1.25 billion) of onshore bonds, according to Reuters calculations.
The suspension of its onshore bonds follows a report by Chinese media outlet Yicai on Friday that the company was heading for a debt restructuring, after missing the payment of two dollar bond coupons due on August 6 for a total of 22, $5 million.
Shares of the developer plunged 18.4% to HK$0.8 on Monday, dragging down the mainland Hang Seng property index, which fell 3.7%. THE action has lost 50 percent so far this month.
Country Garden’s offshore bonds also eased, with a few trading earlier at the lower end of 6 cents on the dollar. Most have since firmed up slightly.
His misfortunes add to the overflow problems on a property walk already struggling with weak buyer demand.
“The problems in the industry have been brewing for a long time, it has erased the wealth effect among investors and no one wants to buy property now,” said Dickie Wong, executive director of Kingston Securities.
Wong said the sector’s impact on the economy had reached a “critical juncture” and regulators should implement more policies, including a further cut in interest rates and reserve rates.
China’s economy grew at a fragile pace in the second quarter as demand weakened at home and abroad, prompting top leaders to pledge additional policy support and analysts to lower their forecasts for growth for the year.
State-owned China Jinmao said in a filing on Sunday that it expected to post an 80% drop in net profit in the first half of this year, due to lower gross profit margins in some projects. and a decline in income from land development.
Its Hong Kong-listed shares fell 4.1% on Monday.
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