Shares of Chinese developer Country Garden plummeted to a record low on Friday amid concerns that the company is preparing for a debt restructuring. The news adds to worries about the property sector outlook in China, especially in the absence of stronger support from Beijing. Country Garden, the country’s top private property developer, is reportedly expected to initiate a restructuring process soon, according to Chinese news outlet Yicai, citing an unnamed financial source. If the company goes through with this, it will join a growing list of developers, including China Evergrande Group and Sunac China Holdings, that have proposed similar debt restructuring terms.
The sell-off in Country Garden’s bonds and shares followed the developer’s warning on Thursday that it may report a loss of up to $7.6 billion for the first half of the year. The company also apologized to investors for misjudging market conditions. Once considered financially stable, Country Garden’s troubles could have ripple effects on homebuyers and financial institutions, further exacerbating a property sector that has already experienced declining sales, tight liquidity, and developer defaults since late 2021.
In July, China’s politburo, a key decision-making body of the ruling Communist Party, pledged to adjust property policies in a timely manner, fueling speculation of potential stimulus measures for the sector, which accounts for a quarter of the country’s economy. However, no significant moves have been made by regulators thus far. On Friday, China’s securities regulator reportedly met with some developers to discuss their sales and debt situations, inquiring about their financing needs and seeking suggestions.
Analysts believe that Country Garden’s recent missed coupon payments could potentially push regulators to implement stronger aid measures. However, there is little confidence that these steps would lead to a quick rebound for the sector. Country Garden has a 30-day grace period for missed payments but also faces other near-term repayment obligations, including over $1 billion worth of onshore bonds due in September. The company may need to request an extension from creditors to ensure liquidity for home construction.
China International Capital Corporation (CICC) has been hired as a financial adviser to Country Garden, according to reports by Yicai and Caixin. Country Garden declined to comment, and CICC did not respond to requests for comment. Country Garden’s shares closed down 5.8 percent on Friday, hitting a record low of HK$0.89 during the day. Most of its dollar bonds also traded at a record low below 7 cents on the dollar. Moody’s, which downgraded Country Garden’s corporate family rating, warned that the company’s credit distress could spill over to China’s property and financial markets, further weakening sentiment and delaying the sector’s recovery.
In its profit warning, Country Garden cited a drop in gross margin and an increase in inventory impairments for its projected net loss of up to 55 billion yuan ($7.6 billion) for the first half of the year. The company also admitted to insufficient understanding of potential risks, such as excessive investment in lower-tier cities. Other developers in the sector, such as China Aoyuan Group and Fantasia Holdings, have also undertaken debt restructuring processes.
Overall, the challenges faced by Country Garden and other developers in China’s property sector have raised concerns about the country’s economic outlook and the potential impact on global markets.
