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
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 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.”
Country Garden facing ‘biggest challenges since establishment’: chairwoman
So far, there is no evidence that suggests the crisis in the property market will be defused any time soon. While China’s top policymakers ditched the slogan “housing is for living, not speculation” at a Politburo meeting in July, there has been no change in the tough restrictions imposed in first-tier cities such as Beijing and Shanghai, which investors say hold sway over China’s property market.
The ripple effect from slumping home prices might be bigger than expected, triggering more defaults by developers, falling government revenues, declining wages for government and property sector workers, and weak consumption, Lu Ting, chief China economist at Nomura Holdings, said in a report on Tuesday.
Country Garden warns of large first-half loss amid real estate sector pressures
Country Garden closed at HK$0.83 on Wednesday, rising 2.5 per cent for a second day of recovery. Jefferies estimates that the developer would need a monthly cash flow of 28 billion yuan (US$3.8 billion) for the rest of the year to break even, while its monthly contracted sales only ranged between 12 billion yuan and 18 billion in the May-to-July period.
Developers that are focused on first-tier cities such as China Resources Land and China Overseas Land and Investment might be safe bets, according to Jefferies.
Meanwhile, T. Rowe Rice prefers convertible bonds to distressed debt to ride out the turmoil.
“As uncertainty looms, we will remain patient for opportunities to arise when the market moves towards peak bearishness, and continue to monitor for policy moves, which have been incremental so far,” said T. Rowe Price’s Chan.