China property: Country Garden default would blight market outlook

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China’s largest private developer has confirmed what investors had been dreading. Country Garden is headed towards a default and has hired legal advisers to help it deal with the consequences. Now, it is not just China’s household wealth and jobs that are at stake. Shockwaves from the Chinese real estate crisis will ripple through Asian markets.

Country Garden is unable to pay $60mn that is coming due. Grace periods for the payments run out in the coming weeks. The developer has about $200bn in liabilities. About $10bn is dollar-denominated debt.

As a result, any restructuring would be of a historic size. There is little hope this would make much difference for creditors. Country Garden’s dollar bonds trade at about 5 cents on the dollar. That is in line with what creditors of other defaulted peers are expected to receive in the case of liquidation.

Country Garden shares have become a penny stock after falling almost three-quarters this year.

Investors are haunted by memories of the 2021 fallout in Asia’s high-yield bond markets and equities that followed a default by Evergrande. The hit this time would be much larger. Country Garden has four times the number of housing projects as Evergrande.

The business, unlike Evergrande, was once seen as a safe bet on China’s property sector. Its solid balance sheet attracted a much wider range of investors, including foreigners.

They have already lost heavily on their investment. The wider economic damage from Country Garden will take longer to emerge.

Country Garden’s September sales volumes fell 81 per cent. Market prices are still nowhere near reaching the bottom. Aggressive policy easing has not rallied plunging sales. As much as 80 per cent of all China’s household wealth is tied up in property.

Net household wealth fell by the largest measure in two decades last year. A lot of savings are frozen in a falling, illiquid market. As a result, many Chinese property owners will feel poorer and consume less. That would fuel the country’s economic slowdown, putting the brakes on equity values across the board.