Wrapup 1: Contagion fears spread as China property sector cash crunch intensifies

China Jinmao Holdings

14/08/2023 14:55

(Adds details on missed investment payments; JPMorgan, Nomura
comments)
    By Clare Jim and Shuyan Wang
       HONG KONG/BEIJING, Aug 14 (Reuters) - China's largest
private real estate developer Country Garden  2007.HK  is
seeking to delay payment on a private onshore bond for the first
time, the latest sign of a stifling cash crunch in the property
sector, piling pressure on Beijing to step in.
    Adding to worries about contagion risk, a major Chinese
trust company that traditionally had sizable exposure to real
estate, Zhongrong International Trust Co, has missed its
repayment obligations on some investment products.
    Analysts warned that a rise in default by trust companies,
also known as shadow banks, which have strong ties to the
domestic property sector, will further weigh on the world's
second-largest economy.
    Anxiety about contagion risks is spreading through global
markets, putting China's government under mounting pressure to
deliver support for the ailing real estate sector, which
accounts for roughly a quarter of the economy.
    Once considered 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 Beijing's support does not materialise soon.
        The real estate sector has suffered tumbling sales,
tight liquidity and a series of developer defaults since late
2021, with China Evergrande Group  3333.HK  at the centre of the
debt crisis.
    Weak overseas demand, tepid domestic consumption and
persistent problems in the property sector have been major
factors in China's struggles to mount a solid post-COVID
recovery.
    In a move that dealt a fresh blow to investors' 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 firms, or shadow banks, operate outside many of the
rules that govern banks, channelling the proceeds of wealth
products sold by banks to developers and other sectors that are
unable to tap bank funding directly.
    Concerns about the outsized exposure of China's shadow banks
- a $3 trillion industry, roughly the size of Britain's economy
- to property developers have grown over the past year as the
sector lurched from one crisis to another.
    JPMorgan in a research note on Monday said that rising trust
defaults would drag down China's economic growth by 0.3-0.4
percentage points directly, and that it expects a "vicious
cycle" of real estate financing challenges.
    "In addition to the apparent financial risks and their
transmissions, the latest wave of defaults from wealth
management firms on trust-related products is likely to cause
some substantial ripple effects for the broader economy through
wealth effects," Nomura said in a separate note.

    
    'CRITICAL MOMENT'
    A source with direct knowledge said on Monday that Country
Garden has proposed to creditors to extend repayment for an
onshore private bond due Sept. 2  CN135797=CDCS , with an
outstanding of 3.9 billion yuan, by three years in seven
instalments.
    Country Garden declined to comment. In separate filings
during the weekend, the developer said it would suspend trading
in 11 of its onshore bonds from Monday, a move traders said
usually signals plans to seek repayment extensions.
    In September alone, Country Garden may need to repay more
than 9 billion yuan ($1.25 billion) worth of onshore bonds,
according to Reuters' calculations.
    The suspension of its onshore bonds followed a report by
Chinese media outlet Yicai on Friday that the company was
heading for a debt restructuring, after it missed payments of
two dollar bond coupons due on Aug. 6 totalling $22.5 million.
    The developer's shares dived 18.4% to HK$0.8 on Monday,
dragging down the Hang Seng Mainland Properties Index  .HSMPI 
which dropped 3.7%. The stock has lost 50% so far this month.
    Country Garden's offshore bonds also eased, with a few
trading at the lower end of 6 cents on the dollar earlier. Most
have since firmed slightly.
    Its woes are adding to spillover concerns across a property
market already grappling with weak buyer demand.    
    "The problems in the sector have been brewing for a long
time, it wiped off the wealth effect among investors and no one
wanted to buy property now," said Dickie Wong, executive
director at Kingston Securities.
    Wong said the sector's impact on the economy has reached a
"critical moment" and that regulators should implement more
policies including further cutting interest rates and reserve
ratios. 
    China's economy grew at a frail pace in the second quarter
as demand weakened at home and abroad, prompting top leaders to
promise further policy support and analysts to downgrade their
growth forecasts for the year.
    State-owned China Jinmao  0817.HK  said in a filing on
Sunday it expected to post a 80% decline in net profit in the
first half of this year, due to a drop in gross profit margin in
some projects and a decrease in land development revenue. 
    Its Hong Kong-listed shares slumped 4.1% on Monday. 

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Significantly underperforming    https://tmsnrt.rs/47pzxTD
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Clare Jim in Hong Kong and Shuyan Wang in
Beijing; Addition reporting by Yuhan Lin in Beijing and Hongwei
Li in Shanghai; Writing by Sumeet Chatterjee; Editing by
Jacqueline Wong, Shri Navaratnam, Simon Cameron-Moore and Jan
Harvey)
 ((clare.jim@thomsonreuters.com;))