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"China's Property Sector Is Crashing Again And
It Has Reached The Country's Biggest Developer"
by Epic Economist
"China’s crashing housing and commercial real estate markets are making the headlines once again as the country’s biggest property developer has been hit by a liquidity crunch and is now at risk of collapsing. Since last year, the slow collapse of the nation’s second-biggest developer, Evergrande, is keeping investors worldwide on edge as they fear the company’s bankruptcy is going to have a knock-on impact on China’s entire real estate sector and send the world into a financial crisis. And now that Country Garden Holdings – the largest investment-grade developer in the country – is in major trouble with international bondholders, it seems that we’re one step closer to a global financial meltdown.
The company was one of the few remaining large, better-quality private developers that had been unscathed by the liquidity crunch, even while other big groups, such as Shimao, faced dramatic reversals in their credit ratings. In December, Shimao’s implosion was viewed as “more devastating than debt crisis at Evergrande and Kaisa”. And now it seems like Country Garden is the final and most visible property giant for contagion risk, as extraordinary levels of stress in the offshore bond market threaten to drag credit ratings down.
Just as Evergrande and every other developer peer that relied on debt to fuel growth, Country Garden needs access to funding in the offshore credit market to pay for its projects. But given that the Chinese government has recently shut that door, the company is now coping with a debt load to the tune of US$11.7 billion, representing its total outstanding US dollar bonds, as Bloomberg reported.
According to Bloomberg, the main risk plaguing the developer right now is its limited access to funding. “Any sign of doubt in the firm's capacity to weather liquidity stress risks may prompt a widespread repricing of other higher-quality developers,” analysts wrote. In other words, if the company doesn’t prove that it’s capable to obtain financial support to finish its projects, it may end up downgrading the credit ratings of its peers and triggering a sizable crash in the nation’s housing prices.
With over 3,000 housing projects spread across every single Chinese province, Country Garden's financial health has enormous economic and social consequences, far greater than Evergrande. Even more worrying, if the group starts showing signs of weakness, it will dramatically damage the already fragile investor and homebuyer confidence, compromising China's economy and even social stability. Experts argue that’s when China's Lehman moment will finally emerge.
Now, investors are paying close attention to Country Garden's capacity to raise funding from a variety of channels, especially considering that the offshore credit market remains effectively closed to most developers. The company must repay or refinance about US$1.3 billion on bonds this year, the majority of which are dollar notes. Its next bond maturity is a US$425 million bond due on January 27. Any indication of default can make the situation far more complicated.
Keeping in mind that investor confidence is at historic lows, and the dollar bond market is essentially shut for developers, the sector currently has very limited refinancing options, which increases the risk of companies failing to pay the debt on time. “Risks across the Chinese property sector are rising, evident from difficult refinancing conditions for even the most well-regarded firms,” said Wei Liang Chang, a macro strategist at DBS Bank. “Greater clarity on the disclosure of liabilities as well as asset sales are crucial to shore up confidence,” he added. Bloomberg estimates also point out that at least seven Chinese developers have defaulted on dollar bonds since October. And this crisis is about to hit a whole new level as the very foundation of the property market loses financial support.
If you’re wondering why does all of this matters, the truth is that as investor and consumer confidence evaporates in China, the inevitable collapse of these massive companies will hamper at least 25 percent of the Chinese GDP and set off a tsunami of bankruptcies this year, leaving a dent on global financial markets and slowing down the global economy.
In the best-case scenario, Beijing will have a recession on its hands. In the worst-case scenario, a depression may follow, which will leave the world’s central banks scrambling to bail out the second biggest economic superpower on the planet. Regardless of the outcome, the impacts are going to be very painful. In short, this means that we’re heading to an era of credit tightening while inflation continues to soar and eats up a larger share of our purchasing power with each passing month."
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