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Country Garden: $7.6bn loss at ‘safe haven’ reflects spreading contagion

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When China’s largest developer says it is struggling to see “dawn light”, it is not just the Chinese who should feel worried. Country Garden, the country’s biggest developer by 2022 sales, warned on Friday that its first-half loss could reach $7.6bn. Earlier this week it confirmed it had missed interest payments on two bonds.

For two decades, China’s highly-leveraged property sector has defied predictions of an implosion. The problems of Country Garden, previously seen as among the safest large developers, show that implosion is gathering pace.

The shares hit a historic low on Friday at HK$0.98, down 64 per cent this year. One of Country Garden’s dollar bonds, due in January, has fallen below 9 cents on the dollar this week, according to Bloomberg data. Moody’s has downgraded the business to Caa1, deep into junk territory.

Country Garden has a 30-day grace period for this week’s missed payments. But next month, more than $1.2bn in new payments come due.

The company has $10bn in dollar bonds outstanding and had more than $190bn in total liabilities at the end of last year. This had looked manageable when asset prices were stronger. No longer.

It is two years since the infamously risky China Evergrande Group defaulted. The strain on Country Garden is occurring despite frantic official efforts to stem contagion.

The rapid deterioration of this strong name deals a heavy blow to investor confidence. Despite aggressive policy easing, property sales fell 28 per cent in June, the fastest pace this year. Unless local homebuyers return to the market en masse, worse will follow.

Beijing is now under pressure to accelerate the rollout of stimulus packages to support the economy. Property accounts for nearly a quarter of China’s gross domestic product.

Investors should stay out of Chinese property stocks and bonds. Would-be bottom fishers are angling over a potential abyss. The question now is not whether contagion will spread, but how far within the Chinese economy and beyond it.

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