China’s real estate sector is once again causing concerns as Country Garden, one of the largest non-state-owned developers by sales, reportedly missed two coupon payments on dollar bonds that were due on Sunday. The bonds in question are notes due in February 2026 and August 2030, according to Reuters. Country Garden has not yet responded to CNBC’s request for comment on the reports.
In another development, Dalian Wanda, a prominent real estate company, saw its senior vice president Liu Haibo taken away by police after an internal anti-corruption probe. Dalian Wanda has not provided any comment on the matter to CNBC.
The news has had an impact on the stock market, with Hong Kong-listed shares of Country Garden closing more than 1.7% lower on Wednesday. The negative market sentiment has also spilled over to other non-state-owned developers such as Longfor, whose shares closed about 0.8% higher after trading lower earlier in the day.
The concerns surrounding China’s real estate sector come at a time when the country’s total home sales in the first half of 2023 have been down year-on-year, along with falling home prices in recent months and faltering economic growth. Sandra Chow, co-head of Asia Pacific Research for CreditSights, owned by Fitch Ratings, commented, “another developer default (and an extremely large one, at that) is perhaps the last thing the Chinese authorities need right now.”
This news raises concerns about the future of the real estate market in China, particularly as big cities are lifting local property restrictions, potentially draining demand in low-tier cities that account for 70% of national new home sales volume, according to Nomura analysts.
The challenges faced by Chinese developers could also have wider implications for the economy. Last year, highly indebted developer Evergrande defaulted, and now with Country Garden in trouble, the private property sector is likely to remain a drag on the country’s growth for the rest of the year, as noted by Rhodium Group.
In an attempt to curb debt-fueled speculation in the real estate market, Chinese authorities have been cracking down on developers’ reliance on debt for growth. However, this has not resolved the issue, and concerns about the real estate market persist. The halt in mortgage payments by many people last year, along with a decline in new home starts for 28 consecutive months, further exacerbate the challenges faced by the sector.
The real estate market plays a significant role in China’s economy, accounting for about a quarter of the country’s GDP. The decline in sales and home prices could have broader implications for consumer sentiment and economic growth.
Country Garden’s missed payments raise questions about its ability to refinance, and other Chinese developers may face similar difficulties in raising money, especially offshore. It is unlikely that the state would step in to bail out real estate developers, given China’s deleveraging campaign. The most likely solution for developers like Country Garden would be asset sales, according to Redmond Wong, market strategist at Saxo Markets Hong Kong.
In contrast to non-state-owned developers, China’s state-owned developers have generally fared better in the real estate slump. Country Garden has had the worst sales performance among China’s top 10 developers this year, with a 39% decline in sales. Vanke was the only other developer to post a sales decline, down 9%, according to E-House Research Institute.
Overall, the concerns surrounding China’s real estate sector, including missed payments, declining sales, and falling home prices, indicate ongoing challenges and uncertainties in the market. The impact of these challenges could extend beyond the real estate sector and have implications for the broader Chinese economy.