Analysis: Latest China developer debt woes could spur policy aid, but industry downbeat

Seazen

09/08/2023 12:33

By Clare Jim
       HONG KONG, Aug 9 (Reuters) - News that big developer
Country Garden was not able to make $22 million in bond payments
is an alarm call for China's government that more private
property companies are close to a tipping point if financial
support doesn’t materialise soon.
    As Country Garden  2007.HK  was the largest developer in the
country before this year, industry executives and analysts told
Reuters its missed payments this week could prod regulators into
rolling out stronger aid measures, but they had little faith
such steps would turn the debt-laden sector around any time
soon.
    Country Garden told Reuters on Tuesday it was not able to
make $22.5 million in coupon payments due on Aug. 6 on two,
dollar-denominated bonds, though both have 30-day grace periods.
    China's property sector, which accounts for a quarter of the
economy, has already seen a string of debt defaults by
cash-squeezed developers since late 2021, with China Evergrande
Group  3333.HK , the world's most indebted property developer,
at the centre of the crisis.
    Contagion fears in the market re-surfaced last month when
four high-profile developers signalled liquidity stress amid
slumping home sales nation-wide.
    Problems are even spreading at state-backed developers,
which are seen as having better access to cheap funding and are
more likely to benefit from government support. 
    State-backed Sino-Ocean Group  3377.HK  is seeking to extend
some offshore bond payments, while Greenland Holdings
 600606.SS  defaulted on an amortization payment.
    A unit of Dalian Wanda Group, the largest commercial
property developer in the country, has also missed a dollar
coupon payment, though Greenland and the Dalian Wanda unit
managed to make the payments later, avoiding official defaults.
    Country Garden's missed payments have triggered a sell-off
in shares and bonds across the sector and fears of more
contagion, analysts at HSBC said in a research note.
    "However, we caution that it’s possible this accelerates the
roll out of a policy package to support the housing market."
        China’s Politburo, a top decision-making body of the
ruling Communist Party, pledged in late July to adjust property
policies in a timely manner, while omitting the often-repeated
phrase used by officials that "houses are for living in, not for
speculation", fuelling speculation more stimulus was on the way.
        
    "IT'S HARD TO SEE THE LIGHT"
    In its statement on Tuesday, Country Garden said "it's hard
to see the dawn light", with its usable cash having declined and
showing "periodic liquidity stress" due to a deterioration in
sales, a difficult refinancing environment and the impact of
various regulations on funding sources.
    While some market participants are hoping Country Garden
could make the latest coupon payments within the grace period,
its massive upcoming bond payment schedule will still be a huge
hurdle to overcome.
    In September alone, Country Garden has a 5.8 billion yuan 
($804.72 million) onshore bond maturing and a 48 million yuan
coupon due, as well as put options on a further 3.4 billion yuan
of paper.
    Offshore, it has coupon payments totalling $58 million due
next month, according to JP Morgan.
    The investment bank said Country Garden's home sales could
slump more than 80% in the rest of this year compared to the
four-year average, as reports of financial distress scare away
potential homebuyers.    
    "Arguably, the (Country Garden) contagion impact will be not
as big as when Evergrande defaulted, because 40% of the market
by 2021 sales has already defaulted," JP Morgan analysts said in
a research report.    
    Executives of developers, both healthier ones and some of
those who have defaulted, told Reuters a default by Country
Garden would have limited impact on the wider sector, as bank
lending and liquidity are already very tight.
    One executive, however, is worried homebuyers would steer
clear of private developers and local governments might tighten
their access to funding even further to ensure they complete
homes that have already been sold. The executive declined to be
identified because he was not authorized to speak to media.
    Reuters reported last week that some cities have made it
harder for developers to access funds from property sales held
in escrow accounts, raising risks the cash-strapped companies
will be squeezed even more.    
    Reviving home sales is key to a recovery, developers said,
but buyer sentiment is at the lowest level they have ever seen
due to the poor outlook for both the sector and the broader
economy, which tipped into deflation in July.
    With fewer visitors to showrooms, the developers expected
sales would remain weak in August and September.   
    "There is oversupply and inventories, we need to digest such
inventories," said a policy adviser, who declined to be
identified as he was not authorized to speak to the media. "It's
difficult given that the population structure has changed and
people are unwilling to buy homes after the COVID (pandemic)."
    Morgan Stanley analyst Stephen Cheung said in a note that
Country Garden's sales are unlikely to show meaningful
improvement in the near term even with policy easing, given weak
consumer confidence and the company's large exposure to less
popular low-tier cities.
        Country Garden declined to comment on the investment
bank reports.
    JP Morgan noted that if Country Garden still defaulted after
policies aiming at boosting liquidity for developers, it would
show that "there is no guarantee of survival".
    "This raises the question of whether government support will
ever be sufficient to prevent another large-scale default."

($1 = 7.2075 Chinese yuan renminbi)

 (Reporting by Clare Jim; Additional reporting by Kevin Yao in
Beijing; Editing by Kim Coghill)
 ((clare.jim@thomsonreuters.com;))