Chinese real estate sector: fears of contagion grow and liquidity crisis grows

The largest private property developer in China, Country Gardenintends to delay the payment of a private bond for the first time onshorethe latest sign of the suffocating shortage of liquidity in the real estatewhich puts pressure on Beijing to intervene.

Adding to concerns about contagion risk, Zhongrong International Trust Co, a major Chinese trust company traditionally exposed to the real estate sector, defaulted on redemption obligations on some investment products.

Analysts warned that rising defaults by trust companies, also known as “shadow banks”which have strong ties to the domestic real estate sector, will weigh even more on the world’s second-largest economy.

Anxiety over contagion risks is sweeping global markets, putting increasing pressure on the Chinese government to provide support for the ailing real estate sector, which accounts for about a quarter of the economy.

The woes of Country Garden, once seen as a more financially sound developer, could also have a chilling effect on homebuyers and finance firms, with more private developers nearing a tipping point if support from Beijing is not materializing soon.

Since late 2021, the real estate sector has suffered from falling sales, tight liquidity and a series of developer defaults, with China Evergrande Group at the center of the debt crisis.

Weak foreign demand, tepid domestic consumption and persistent problems in the real estate sector have been important factors in China’s effort to kick-start a robust post-COVID recovery.

In a further blow to investor confidence, two Chinese listed companies declared over the weekend that they had not received payment for expired investment products from Zhongrong International Trust Co.

Trust companies operate outside of many of the rules that govern banks, funneling proceeds from wealth products sold by banks to developers and other sectors that cannot directly access bank financing.

Concerns about the huge exposure of these entities – a $3 trillion sector, almost the size of the British economy – to property developers have grown in the last year, as the sector went from crisis to crisis.

JPMorgan said in a research note on Monday that rising trust defaults would directly weigh on Chinese economic growth by 0.3 to 0.4 percentage points, and it expects a “vicious circle” real estate financing problems.

“In addition to the obvious financial risks and their transmissions, the latest wave of defaults by wealth management companies on trust-related products is likely to cause some substantial ripple effects for the broader economy through wealth effects,” Nomura said on a side note.

A source with direct knowledge said Monday that Country Garden has proposed to its creditors to extend the repayment of a private bond. onshore maturing on September 2, with an outstanding balance of 3.9 billion yuan, in three years in seven installments.

Country Garden declined to comment. In other documents filed over the weekend, the developer said it will suspend trading on 11 of its bonds. onshore starting Monday, a move that operators say typically signals plans to request extensions of refunds.

In September alone, Country Garden may have to repay more than 9 billion yuan ($1.25 billion) in national bonds.

The suspension of its bonds came after Chinese outlet Yicai reported on Friday that the company was heading toward a debt restructuring after defaulting on two coupons totaling $22.5 million due on August 6.

On Monday, the developer’s shares plunged 18.4% to HK$0.8, dragging down the Hang Seng Mainland Properties Index, which fell 3.7%. So far this month, the papers have lost 50%.

bonds offshore Country Garden prices were also down, with some of them trading as low as 6 cents on the dollar. Since then, most have gone up slightly.

Country Garden’s woes add to widespread unease in a housing market already grappling with weak demand.

“The problems in the sector have been brewing for a long time, they have killed the wealth effect among investors and now nobody wants to buy properties,” stated Dickie Wong, CEO of Kingston Securities.

Wong stated that the sector’s impact on the economy has reached a “critical moment” and that regulators should apply more policies, such as further cutting interest rates and reserve ratios.

China’s economy grew at a weak pace in the second quarter as domestic and foreign demand weakened, prompting top leaders to pledge more political support and analysts to lower their growth forecasts for the year.

Source: Reuters