Real Estate Market in China Facing Collapse – Threat of a Domino Effect

Real Estate Market in China Facing Collapse – Threat of a Domino Effect

Her net worth has dropped by 84% or $28.6 billion since June 2021. On Tuesday alone, she lost $490 million. Currently, Yang Huiyan's estimated wealth is $5.5 billion, marking the most significant decline among super-billionaires in this period, and she is now ranked only 475th on Bloomberg's list of the world's richest people.

Country Garden, once the largest Chinese construction company, failed to pay interest on two US dollar-denominated bonds, as announced on Tuesday, which has raised concerns among investors. As a result, the construction giant's stocks dropped by 16% on the Hong Kong stock exchange.

Citing an anonymous source from Country Garden, the Chinese state media company paper.cn reported that the company had experienced a "temporary liquidity stress" due to weakening sales and increasing difficulty in refinancing. A source familiar with the situation in the company stated that they were actively seeking funds to resolve the debt crisis to protect the rights of their creditors.

The once highly prosperous Chinese real estate industry accounted for as much as 30% of the country's GDP. However, many major construction entrepreneurs had accumulated massive debts, like the case of Evergrande, which collapsed two years ago, triggering a wave of financial defaults across the entire industry.

Country Garden made its debut on the public market in 2007 with a record-breaking initial public offering of $1.7 billion on the Hong Kong stock exchange. In March of this year, Yang succeeded her father, Yang Guoqiang, as the company's president, a company he had founded.

Investors’ Confidence Shaken

Investor confidence in the troubled Chinese real estate sector has been shaken once again this week due to reports that Country Garden failed to pay interest on two bonds.

The vast Chinese real estate industry had long been a significant driver of growth for the world's second-largest economy, accounting for as much as 30% of the country's GDP. However, many major construction entrepreneurs had accumulated massive debts, which was typical of the downfall of Evergrande two years ago, leading to a wave of defaults across the industry.

Although Country Garden still has a 30-day grace period before it can be marked as a defaulter, the declining market confidence indicates that investors are concerned about the company's future.

Ranked as number 1 in sales last year, Country Garden is one of several major Chinese construction companies that have not yet fulfilled their obligations since the liquidity crisis engulfed the Chinese real estate sector more than two years ago.

Furthermore, the company dropped to the 5th place in sales during the first half of this year, according to China Index Academy, a leading Chinese real estate research company. This signifies that even the largest players in the industry are suffering from the worst property market decline in the country.

"If Country Garden, China's largest private construction company, fails, it could trigger a crisis of confidence in the real estate sector," said Edward Moya, a senior market analyst for OANDA.

Pressure is rising

Country Garden's shares have lost more than 30% of their value since last week after it warned of an unaudited net loss in the first six months of this year.

"The company will actively consider taking various measures to ensure the safety of cash flow. In the meantime, it will actively seek guidance and support from the government and regulatory bodies," the company stated on July 31.

On the following day, it was announced that the company had canceled its attempt to raise $300 million by issuing new shares.

On August 3, Moody's downgraded Country Garden's credit rating to B1, indicating that it views its debt as "highly risky."

"The downgrade is in line with our expectations that Country Garden's credit metrics and liquidity buffer will weaken due to the decline in contracted sales, still limited access to financing, and significant debt maturities over the next 12 to 18 months," said Gavin Cang, Senior Vice President at Moody's.

Property Crisis Deepening

The Chinese real estate industry has been in a historic downturn for the past two years. People have become reluctant to buy new homes as growing unemployment discourages potential buyers.

The situation where numerous real estate giants in 2021 failed to meet their obligations has also undermined confidence in the sector and led to many property buyers paying for apartments they never received, which sparked protests.

Sales of new homes by the top 100 Chinese companies have dropped by 33% in July compared to the previous year, marking the most substantial monthly decline since July 2022, according to industry statistics published last week.

Investors consider the revival of the sector as key to the economy's recovery after three years of self-imposed isolation due to the coronavirus pandemic.

Recent signals from top officials indicate that Beijing is becoming increasingly concerned about growth and has recognized the need to strengthen the sector.

Last Monday, Premier Li Keqiang promised to "adjust and optimize" policies to ensure a healthy and stable development of the real estate market, calling on cities to implement measures that meet their specific needs.

Last month, the People's Bank of China said it would give construction companies another 12 months to repay their outstanding debts maturing this year.