2023-08-14 10:27:04
Update
August 14, 2023
12:27
The contraction in real estate investment has likely worsened in China, with fears of a debt crisis at a major developer, Country Garden.
China’s economic recovery is hampered by a worsening property crisis, with latest data suggesting few signs of growth rebound. Official figures due Tuesday are expected to show moderate increases in industrial production, retail sales and investment in fixed assets in July.
All eyes are now on real estate investment, which probably contracted further in July, bringing the drop in the first seven months of the year to 8.1% compared to the same period a year earlier, according to economists polled by Bloomberg. A worsening from the 7.9% drop in the first six months of the year.
The promoter’s action Country Gardenone of the largest real estate groups in China, lost 18.3% – a historic low – on Monday on the Hong Kong Stock Exchange, at a time when the precarious financial health of the company and its astronomical debt are worrying the markets. The title has lost 42% of its value in the space of a month.
Country Garden is a private giant in its country, present mainly in secondary towns and which employs tens of thousands of employees. The group is listed in the Forbes list of the 500 largest companies in the world and his boss, Yang Huiyan, was until recently the richest woman in Asia.
The group, long reputed to be financially sound, was incapable last Monday to fulfill two repayments of interest on loans. It has a 30-day grace period and risk of default in September if he does not pay. Against all expectations, the company also announced during the weekend to suspend the quotations of a dozen bonds as of Monday.
Letter of apology
Its abysmal debt – some 1.152 billion yuan (150 billion euros) at the end of 2022 – now raises fears of a bankruptcy bringing social and economic instability for the country, two years following the setbacks of its competitor Evergrande. The Country Garden boss admitted in a letter of apology on Friday that her business was struggling because of the economic climate “the greatest difficulties” since its creation.
Yang Huiyanwho became a billionaire at the age of 25 by inheriting the shares of the group founded by her father, however reassured regarding the combativeness of Country Garden to get by and survive.
Like Evergrande, its competitor in debt to the tune of more than 300 billion euros, any collapse of Country Garden would have catastrophic repercussions on the Chinese financial system and economy. The group, which is due to publish its half-year results later this month, says it expects a net loss of around 45 to 55 billion yuan (between 5.6 and 7 billion euros).
To add to the pressure, 31 billion yuan (3.9 billion euros) of bonds will mature in 2024, according to the rating agency Moody’s, which on Thursday lowered the group’s solidity rating to “Caa2”, synonymous with “very high credit risk”.
Major risk
The housing reform in China, which created a genuine real estate market at the end of the 1990s, led to a meteoric boom in the sector, maintained by social norms, the acquisition of property often being a prerequisite for marriage.
More the massive indebtedness of promoters has been perceived in recent years by the authorities as a major risk for the country’s economy and financial system. To reduce the indebtedness of the sector, Beijing has gradually tightened the conditions for access to credit for developers from 2020which dried up the sources of financing for groups already in debt.
A wave of defaults followed, notably that of the Evergrande group, which undermined the confidence of potential buyers and reverberated throughout the sector, once morest the backdrop of an economic slowdown in China.
Yuan weakness
Moreover, regarding the country’s interest rates, the People’s Bank of China is still constrained by a weak yuan. The currency has approached its lowest level this year. The offshore yuan fell as much as 0.3% on Monday to hit 7.2816 to the dollar, less than 0.1% from its 2023 low of 7.2857 set in June. The currency is now down regarding 5% this year, being the worst performer in Asia following the yen and the South Korean won.
These fears regarding the Chinese economy weighed on the Tokyo Stock Exchange, which closed sharply lower on Monday. The flagship Nikkei index lost 1.27% to 32,059.91 points and the broader Topix index lost 0.98% to 2,280.89 points. The Hang Seng index in Hong Kong fell regarding 2% around 7am GMT.
According to economists polled by Bloomberg, the Chinese central bank should keep an interest rate unchanged Tuesday, even though deflation was evident in the economy last month. The central bank is acting cautiously on interest rates to avoid putting more pressure on this already weak yuan and encourage more capital outflows. Since late June, it has set a higher-than-expected benchmark rate for the yuan to support the currency.
Among the most worrying figures, bank lending fell to its lowest level in 14 years, consumer prices and producer prices both fell, and exports saw their biggest drop since February 2020. The faltering economy and lack of effective recovery measures left the yuan with little support as the dollar strengthened.
“Pressure along the real estate value chain, such as sales, land acquisition and construction, may continue to weigh on economic growth.”
What growth?
“We believe that pressure along the real estate value chain, such as sales, land acquisition and construction, can continue to weigh on economic growth“, China International Capital Corp. analysts, including Zhang Wenlang, wrote in a note last week.
For their part, Bloomberg economists “expect July activity data in China to show further weakening in the economy. Extreme weather likely hampered investment. The collapse of the real estate market has probably supplanted the impact of a busy summer season, weighing on consumption. Policy announcements suggest support ahead, but that won’t be apparent in the July numbers.”
So much bad news that further jeopardizes the likelihood of growth in the Chinese economy this year. But some economists remain optimistic for the moment. “We consider that there are balanced risks for our 5.4% growth forecast in 2023with positive fiscal stimulus, a still accommodative monetary stance and more supportive housing policies for the remainder of the year, offsetting external demand headwinds and weak real estate sales and investment,” wrote Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc.
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