China’s Country Garden dodges second default, eases property sector worries

HONG KONG, CHINA: China’s leading private property developer, Country Garden, successfully met its interest payment obligations on US dollar bonds, narrowly avoiding default just hours before a grace period deadline.

This move comes as a much-needed respite for China’s beleaguered property sector, which has been grappling with a financial crisis.

Country Garden had initially failed to make coupon payments totalling US$22.5 million, which were due on 6 August, intensifying concerns about its liquidity and sending shockwaves through financial markets. The 30-day grace periods on these bonds kept markets anxious.

While the amount in question may seem modest, the repercussions of a default would have had far-reaching consequences. It could have shaken the fragile confidence in China’s economic stability, which was being propped up by a steady stream of policy stimulus, particularly in the property market.

A default would have also raised the spectre of similar outcomes for other dollar bonds and potential calls from creditors for accelerated payments. It could have exacerbated concerns about a spillover effect in China’s banking system, the world’s second-largest.

Country Garden also proposed an extension of the repayment period for eight onshore bonds valued at 10.8 billion yuan (US$1.48 billion), a move aimed at easing its financial burden, according to confidential sources and documents obtained by Reuters. These bonds, issued by both Country Garden and its subsidiary, were originally set to mature in 2023 and 2024.

Economists and analysts remain cautious, highlighting the need for continued government stimulus and regulatory relaxation to stabilize the property sector, restore consumer confidence, and facilitate eventual recovery.

The ongoing financial squeeze faced by Country Garden underscores the fragility of China’s real estate sector, a pivotal contributor to its economy.

This sector has been under duress since the government launched a campaign against excessive leverage in 2021, a situation compounded by a lackluster post-pandemic economic recovery.

Recent data showed that the services sector activity in August grew at its slowest pace in eight months, signalling weak demand and casting doubts on the effectiveness of stimulus measures in reviving consumption.

Global stock markets fell on Tuesday as the weak services data rekindled worries over the health of China’s economy, though factory surveys hinted at some signs of steadying.

Country Garden’s situation has also had repercussions in the financial markets, with some of its dollar bonds experiencing a modest increase in prices following the successful interest payments. However, these bonds are still trading at distressed levels, ranging from 11 to 15 cents on the dollar.

Despite its challenges, Country Garden has not defaulted on any debt payments, whether onshore or offshore.

Nevertheless, the company had warned of potential default risks should its financial performance continue to deteriorate after reporting a significant loss in the first half of the year.

According to research house CreditSights, with approximately US$162 million in offshore bond interest payments due for the remainder of the year, the company’s future remains uncertain, and the market closely watches for further developments.

Country Garden’s successful extension of onshore debt maturities may set a precedent for negotiations with creditors both onshore and offshore. Still, its ultimate fate hinges on China’s ability to reverse the property market’s downward trend, said Ting Meng, a senior credit strategist at ANZ, quoted by Reuters.

“The three-year extension of maturity offered by Country Garden looks better than restructuring plans by most of the other troubled developers,” Meng said.

“But the key is whether the plan could roll out smoothly, which can only be achieved if China manages to turn around the downward spiral on its property market,” she added.