Country Garden, Like Evergrande Before It, Flags Huge Loss. The Stock Plummets.

“The industry has entered an unprecedented difficult period,” the group detailed in filings with the Hong Kong stock exchange. “The overall market has not yet recovered, the absolute scale of the industry has declined, and the capital market needs time to restore its confidence.”

Country Garden stock has lost nearly one-third of its value over the past five days and prices for its corporate bonds have plunged, indicating investors are bracing for default. The group missed interest payments on two offshore bonds this week, according to reports citing the company, which is the first stage on the road to complete default.

“The Company will adhere to its responsibilities, spare no effort in self-rescue, take effective measures, and strive to reverse the prevailing difficulties,” the company said. “The Board would like to sincerely ask for understanding and support.”

Chinese developers took on massive debt over the past couple of decades to fuel fast expansion in the world’s most populous country. An economic slowdown, triggered by the pandemic and fueled by the government’s zero-Covid policy, catalyzed the sector’s financial problems, with an anticipated recovery in 2023 largely failing to materialize.

“The problems of China’s property developers are only getting more severe as the housing downturn continues,” Rosealea Yao and Xiaoxi Zhang, analysts at research firm Gavekal Dragonomics, wrote in a note this week.

Issues in China’s sprawling and indebted real estate sector are both a symptom of the economic challenges the country faces and a cause of distress as failures threaten to ripple across society and the Chinese financial system.

“Intensifying financial distress could mean not just more bond defaults, but also that many cannot continue to operate normally, which would lead to substantial disruptions in the real economy,” the team at Gavekal said. “Policymakers are attempting to help the firms obtain more financing, but unless there is a stabilization in housing sales, developers are getting trapped in a downward spiral.”

While the government has rolled out stimulus measures in recent months, investor reaction has been tepid, and support has done little to address systemic property sector woes. Country Garden’s crisis is reminiscent of the market-moving meltdown of Evergrande two years ago—so there is scope for worries to become more widespread. 

Indeed, concerns about Country Garden—alongside the latest batch of grim Chinese economic data—rattled both Asian and U.S. markets earlier this week, accelerating losses for the
Dow Jones Industrial Average
and
S&P 500.

While investors are split on the severity of China’s economic slowdown, it remains clear that cracks in the property sector will continue to be a significant drag on appetite for investment in the country, home to widely held stocks such as
Alibaba
(BABA).

“We have always been confident in the prospects of China’s economy,” Country Garden said in its filings. That sentiment might look as misguided as any optimism about the company’s future.

Write to Jack Denton at [email protected]