Another Black Swan Event For China's Real Estate Market? China's Former Largest Real Estate Developer Is Sounding The Alarm

The Chinese real estate market is experiencing another potential black swan event as Country Garden, once China's largest property developer by sales, spirals into a crisis that threatens to surpass the impact of China Evergrande Group. 

The Foshan-based Country Garden is under heightened scrutiny because it oversees four times as many property projects as Evergrande. China's housing slump is exacerbating broader concerns over its economy, with signs of spillover effects ranging from missed payments by major shadow banks to a bond sell-off among Hong Kong property developers.

While the U.S. Market has seen turmoil, many markets are on the rebound. S&P 500 is up over 18% year-to-date, and the housing market continues to climb despite rising interest rates. The retail startup investing market continues to do well, with platforms like StartEngine having nearly $100 million invested in their platform this year alone, including over $17.5 million invested in their ongoing raise.

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Liquidity Crisis And Missed Payments

Country Garden revealed that it is in ongoing negotiations with bond investors and banking institutions to extend maturities and secure its financial position. The company has already missed interest payments on some dollar bonds. Significant dates are fast approaching, including a yuan bondholders' vote this week on extending the payment deadline of a bond due Sept. 4. Additionally, the company must navigate the end of grace periods for a combined $22.5 million in dollar-note coupons by early September.

Financial Strains And Asset Devaluation

The situation is particularly alarming as Country Garden's bonds are trading at deeply distressed levels. A $1 billion note set to mature in January is currently trading at less than 13 cents on the dollar. The company has also seen its stock plunge by 67% this year, relegating it to penny stock status. Despite a 39% increase in revenue, the company posted a net loss of 48.9 billion yuan ($6.72 billion) for the first half of 2023, compared to a profit of 612 million yuan a year earlier.

Lack Of Proactive Measures

In a recent filing, Country Garden admitted to a lack of timely action to counteract the market slowdown. It also confessed to underestimating the risks associated with its heavy focus on lower-tier property markets. 

"The profundity and persistence of the market's downtrend still caught the company off guard," the filing stated.

Key financial figures:

• Revenue rose by 39.4% to 226.3 billion yuan.
• Core net loss was 45.3 billion yuan, in stark contrast to a core net profit of 4.9 billion yuan last year.
• Total debts shrank slightly to about 257.9 billion yuan, but roughly 108 billion yuan is due within the next 12 months.
• Cash balance dwindled to 130.6 billion yuan, including 29.5 billion yuan in restricted form.

What's Next For The Chinese Economy?

The property slump in China has taken another hit with new home sales declining the most in the past year as of July. Despite a recent easing in mortgage policies by the central government, analysts remain skeptical that these measures will be sufficient to arrest the economic decline. China's major banks are also reportedly preparing to slash interest rates on existing mortgages and deposits to boost growth.

The unfolding crisis at Country Garden adds another layer of urgency to China's economic challenges and raises new questions about the stability of the global economy. The consequences of a potential collapse would be far-reaching, impacting not just the real estate sector but also financial markets and economic growth both within China and globally.

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