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China’s Country Garden Bonds Suffering Amidst Potential Default

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China’s Country Garden bonds have recently experienced a decline, reaching distressingly low levels due to the company’s losses and the possibility of default. In response, trading for at least 10 onshore bonds has been suspended, according to a statement made by the property developer to Hong Kong’s regulator. The company had already warned of a potential loss of up to RMB55 billion ($7.62 billion) for the first half of the year. Additionally, Country Garden missed $22.5 million in interest payments on debt valued at $1 billion.

Moody’s Investors Service downgraded the company’s rating further into junk bond territory, raising concerns about China’s heavily indebted property market and citing previous defaults, including from China Evergrande Group. As a result, Morgan Stanley analysts have decided to slash Country Garden shares, shifting their assessment from equal-weight or neutral to underweight. They have also reduced their share price target from HK$2.40 to HK$0.75, representing a 69% decrease.

Analysts, like Stephen Cheung, have predicted that negative news flow may lead to an even worse sales performance for the company. This could further worry homebuyers who are already concerned about the halt in construction of undelivered projects.

Data from BondCliQ Media Services reveals that distressed funds have taken interest in buying these bonds over the past 10 days. These funds are capitalizing on the opportunity presented by the low prices at which the notes are currently trading, as low as 6 to 9 cents on the dollar, according to one market source.

Property Sales in China in Decline

By Cedric Rimaud, Analyst at Gimme Credit

The real estate industry in China is experiencing a significant decline in contracted sales, posing a threat to the overall economy. The National Bureau of Statistics has reported a 28% decrease in property sales at the national level in June, highlighting the severity of this industry-wide phenomenon.

The inability of property developers to secure financing has led to unfinished projects, resulting in cautious buyers. To assist developers in completing pre-sold housing projects, the Chinese central bank has extended special loans until May 2024. This extension offers an additional year for completion.

Country Garden’s controlling shareholder, Yang Huiyan, who inherited her father’s fortune and founded the company in 1992, is expected to offer support. However, even with her involvement, a default may still be imminent.

This downturn in contracted sales not only affects Country Garden but also has far-reaching implications for the entire country. Urgent measures are required to ensure stability and mitigate the potential economic consequences.

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