Contagion fears have spread as the monetary crisis in China’s real estate sector intensifies

The corporate logo of Chinese developer Country Garden is pictured at the Shanghai Country Garden Center in Shanghai, China on August 9, 2023. REUTERS/Aly Song/File Photo

HONG KONG/BEIJING (Reuters) – China’s largest private real estate developer Country Garden (2007.HK) is seeking to defer repayments on a private domestic bond for the first time, in the latest sign of a stifling cash crunch in real estate. sector, increasing pressure on Beijing to intervene.

Adding to concerns about contagion risk, a major Chinese trust that has traditionally had significant exposure to real estate, Zhongrong International Trust Co, has missed repayment obligations on some investment products.

Analysts have warned that rising rates of defaults by credit companies, also known as shadow banks, which have strong ties to the local real estate sector, will further impact the world’s second-largest economy.

Concern about contagion risks is spreading across global markets, putting the Chinese government under increasing pressure to provide support to the ailing real estate sector, which accounts for roughly a quarter of the economy.

Once considered a more financially secure developer, Country Garden’s woes could have a chilling effect on homebuyers and financial firms, with more private developers approaching the tipping point if Beijing’s support does not materialize soon.

The real estate sector has suffered from falling sales, tight liquidity and a series of defaults since late 2021, with China Evergrande Group (3333.HK) at the heart of the debt crisis.

Weak external demand, tepid domestic consumption and persistent problems in the real estate sector were key factors in China’s struggle to make a strong post-COVID recovery.

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In a move that dealt a fresh blow to investor sentiment, two Chinese listed companies said over the weekend that they had not received payment for investment products owed by Zhongrong International Trust Co.

Trust companies, or shadow banks, operate outside many of the rules that govern banks, channeling proceeds from the wealth products that banks sell to developers and other sectors unable to benefit from bank financing directly.

Concerns about the massive exposure of Chinese shadow banking – a $3tn industry, which is roughly the size of the British economy – to property developers have grown over the past year as the sector has lurched from crisis to crisis.

JPMorgan said in a research note on Monday that rising confidence defaults would lower China’s economic growth by 0.3-0.4 percentage points directly, and that it expected a “vicious cycle” of mortgage financing challenges.

“In addition to the obvious financial risk and transmission, the recent wave of defaults from wealth management firms on trust-related products is likely to cause some significant multiplier effects for the broader economy through wealth effects,” Nomura said in a separate note.

Reuters graphics

‘A decisive moment’

A source familiar with the matter said Monday that Country Garden has proposed to creditors to extend the repayment of inland private bonds due on Sept. 2, with 3.9 billion yuan, for three years in seven installments.

Country Garden declined to comment. In separate filings over the weekend, the developer said it would suspend trading on 11 of its internal bonds from Monday, a move that dealers said usually indicates plans to seek a payment extension.

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In September alone, the country garden could need to repay more than 9 billion yuan ($1.25 billion) in inland bonds, according to Reuters calculations.

The suspension of its internal bonds followed a report by Chinese media outlet Yicai on Friday that the company was heading for a debt restructuring, after it defaulted on two dollar bonds due Aug. 6 totaling $22.5 million.

Shares of the developer fell 18.4% to HK$0.8 Monday, pulling down the mainland Hang Seng Properties Index (.HSMPI), which fell 3.7%. The stock has lost 50% so far this month.

Country Garden’s overseas bonds also eased, with a few trading at the lower end of 6 cents against the dollar earlier. Since then, most of them have held together quite a bit.

Its troubles add to spillover concerns across a real estate market already grappling with weak buyer demand.

“Problems in the sector have been brewing for a long time and have killed off the wealth effect among investors, and no one wants to buy property now,” said Dickie Wong, chief executive at Kingston Securities.

Wong said the sector’s impact on the economy had reached a “critical moment” and that regulators should implement more policies, including lowering interest rates and reserve ratios.

China’s economy grew at a subdued pace in the second quarter as demand at home and abroad weakened, leading top leaders to promise more political support and analysts to cut growth forecasts for this year.

State-owned China Jinmao Corporation (0817. Land development proceeds.

Its Hong Kong-listed shares fell 4.1 percent on Monday.

(Reporting by Claire C. in Hong Kong and Shuyan Wang in Beijing) Additional reporting by Yuhan Lin in Beijing and Hongwei Lee in Shanghai; Writing by Sumit Chatterjee. Editing by Jacqueline Wong, Shri Navaratnam, Simon Cameron-Moore and Jean Harvey

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