Country Garden crisis could trigger a contagion effect in China’s private property sector, deter homebuyers, T. Rowe Price and Jefferies say

Country Garden’s missed coupon payments could impact other private property developers, triggering a contagion effect, T. Rowe Price analyst says

The Hang Seng Mainland Properties Index of key Chinese developers trading in Hong Kong has dropped 4.1 per cent this week, extending last week’s 10 per cent decline

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A residential project developed by Country Garden in Baoding, in China’s Hebei province. Photo: Bloomberg

Published: 8:00am, 17 Aug 2023Updated: 10:36am, 17 Aug 2023

The liquidity crisis at Chinese property developer Country Garden Holdings could spill over to its peers, as the values of their collaterals decline and homebuyers become more cautious about purchases, particularly in smaller cities.

Developers that are privately run and have high exposure to China’s third and fourth-tier cities will bear the brunt of any contagion risk after Country Garden, once a top industry player, missed US$22.5 million in coupon payments last week, according to US money manager T. Rowe Price Group and investment bank Jefferies Financial Group.

“The repercussions of Country Garden’s missed coupon payments could extend beyond the company itself, impacting other private property developers and potentially triggering a contagion effect,” said Sheldon Chan, a portfolio manager at T. Rowe Price with US$1.43 trillion in assets under management. “In the event of a default, other private property developers may also experience collateral damage.

“The Chinese property sector is anticipated to experience a multi-year structural decline as housing demand shrinks due to factors such as population decline, slower urbanisation, and changes in family formation.”

After a sell-off that turned Country Garden into a penny stock for the first time since it went public in Hong Kong in 2007, investors continue to dump property stocks and bonds amid fears that its cash crunch will infect other firms, spreading quickly and unchecked. The Hang Seng Mainland Properties Index of key Chinese developers trading in Hong Kong has dropped 4.1 per cent this week, extending a 10 per cent decline for the previous five-day period.

In the bond market, even Longfor Group Holdings, which has the least exposure to smaller cities, is reeling from the Country Garden Crisis. Its 3.95 per cent US-dollar bond maturing in September 2029 tumbled 6.6 per cent to 49.84 cents on Wednesday, extending a 9 per cent decline a day earlier.