In a dramatic turn of events, China’s largest private property developer, Country Garden, narrowly escaped default for the second time in four days by making last-minute interest payments on its U.S. dollar bonds. This eleventh-hour rescue effort has brought much-needed relief to the beleaguered property sector and financial markets alike.
Previous Payment Failure
Country Garden had failed to meet the $22.5 million coupon payment due on its U.S. dollar bonds on August 6, sparking concerns about its liquidity and sending shockwaves throughout the industry. The 30-day grace period that followed kept investors and the broader market on edge. While the sum in question may appear relatively modest, its potential default would have had far-reaching implications.
Failure to honor the bond payments would have shattered the fragile optimism in financial markets, where many hoped that China’s consistent policy stimulus would stabilize both the economy and the struggling property market. Moreover, it could have triggered defaults on other dollar bonds and accelerated creditor demands for payments, all while increasing concerns about economic spillover risks in the world’s second-largest economy.
In a bid to mitigate the crisis, Country Garden also offered to extend the repayment period of eight onshore bonds, worth a staggering 10.8 billion yuan ($1.48 billion), by an additional three years. These bonds, issued by Country Garden and one of its subsidiaries, were originally set to mature in 2023 and 2024, according to documents seen by Reuters. The company, however, has remained tight-lipped about its financial situation.
Economists and industry experts are closely monitoring Country Garden’s precarious financial position, emphasizing that its ability to meet debt obligations will depend on the effectiveness of the latest round of stimulus measures and regulatory relaxations. The Chinese government has recently implemented several stimulus measures, including lower mortgage rates and preferential loans for first-home buyers in major cities, in an effort to stabilize the housing market and boost consumer confidence. While these steps are welcomed, more extensive support may be needed to restore confidence in the sector and help property firms regain financial stability.
Fragile Real Estate Sector
Country Garden’s ongoing financial struggles underscore the fragile state of China’s real estate sector, which represents about a quarter of the country’s economy. This situation has worsened since the government’s crackdown on high leverage began in 2021, exacerbated by a lackluster post-pandemic economic recovery.
Although Country Garden managed to make its interest payments on offshore bonds in the nick of time, bond prices remain distressed, trading between 11 to 15 cents on the dollar. Meanwhile, the company’s share price experienced a slight decline, highlighting ongoing concerns in the market.
Country Garden has not yet missed any debt payments, either onshore or offshore. However, it has cautioned about the risk of default should its financial performance continue to deteriorate after reporting a record loss for the first half of the year. With approximately $162 million in offshore bond interest payments due later this year, the company faces an uphill battle to regain stability in a turbulent market.