China property crisis: PBOC takes immediate action as Country Garden sparks renewed contagion fears

UPDATED AUGUST 31 | China’s largest property developer, Country Garden, has reported a record half year loss of almost US$7 billion and provided investors an ominous warning about its ongoing ability to repay debts.

“If the financial performance of the Group continues to deteriorate in the future, the Group might not be able to fulfill the financial covenants of these borrowings, which may result in default in these borrowings and cross-default in certain other borrowings,” the company said in its interim results released to the Hong Kong exchange.

It added there is “significant doubt on the Group’s ability to continue as a going concern.”

The developer revealed it has “commenced negotiations” with bondholders of yuan-denominated bonds which are due over the coming 12 months.

It also confirmed it failed to make interest payments due in August 2023 of certain senior notes.

The alarming rhetoric is an indication that the China property crisis is deepening.

While Country Garden’s known liabilities of $190 million are less than China Evergrande‘s reported liabilities of $300 billion, it currently has 3,103 property developments underway across mainland China.

That’s four times more than Evergrande.

China property crisis
An excerpt from Country Gardens interim results released to the Hong Kong Exchange on 30/08/23

Country Garden sparks knee-jerk PBOC move

In a stunning indication of the critical juncture the China property crisis is now at, the Peoples Bank of China (PBOC) moved late on Thursday (China time) to pledge support for the sector.

The central bank said it would be lowering mortgage down-payment minimums to 30% for both first a second-time home buyers.

It also announced it would lower rates on existing mortgages from September 25 – a move that will have a stimulatory affect on the broader China economy.

The news was revealed in a joint statement released by the People’s Bank of China and the National Administration of Financial Regulation a short time ago. It comes just over 24 hours after Country Garden’s half year results release.

One China-based equities analyst speaking to Asia Markets described it as an “uncharacteristic knee-jerk reaction” by the Chinese Government to Country Garden’s shocking half year result.

However, he added it’s a good indication more “real economy stimulus” is imminent.

China property crisis contagion risk intensifies

George Magnus, a leading economist and author of Red Flags: Why Xi’s China is in Jeopardy, has shared his views on the implications of the demise of Country Garden in an blog post on The Spectator.

“Its (Country Garden’s) financial demise is not quite on the scale of Evergrande, but it comes at a worse moment, when China’s economy is in the eye of a bad economic news storm, consumer and business confidence are fragile, and when the word ‘contagion’ has resurfaced.  

“If Country Garden has to write off unsold or uncompleted homes, or if prices fall even more significantly, there will be greater contagion risk. The unfolding problems in property and finance are the proximate cause of China’s current economic hiatus, but the bigger story is that China’s development model is no longer fit for purpose, and hasn’t been for some years.

As many people now recognise, China is flush with excess debt, has poor demographics and productivity, weak governance, and a politicised business environment. Against this backdrop, it is clear that the government faces a huge challenge. But it also seems to be at a loss about what to do about it.

Asia Markets recently reported on enormous challenges facing China’s three trillion-dollar Trust Company industry, which are link to the China property crisis.

Sources telling this publication a catastrophic wave of Chinese trust company bankruptcies is likely in the coming months as many have continued to lend money to troubled real estate developers, in order to generate higher yields on risker loans.

Further Reading: Marco Metzler insisted China Evergrande was bankrupt in 2021, now his critics have been silenced