After Country Garden debt deal, focus shifts to China property recovery prospects

Country Garden's deal with creditors for an extension on onshore debt payments worth 3.9 billion yuan (US$537 million, RM2.5 billion) has brought the developer and China's crisis-ridden property sector some much-needed respite.

But while investors in the company may be heaving sighs of relief, it remains to be seen whether a raft of government stimulus measures will soon help revive demand, ease the sector's cash squeeze and lift the gloom over the world's second-largest economy.

The financial woes of China's top private developer have only further highlighted the fragile state of the country's real estate industry which accounts for roughly a quarter of the economy and has been in dire debt straits since 2021.

Considered financially sound compared to peers, Country Garden had not missed a debt payment obligation, onshore or offshore, until coupon payments on dollar bonds last month after slowing home demand hurt its cash flow.

Since then, Chinese authorities have rolled out a number of measures, the most significant being the lowering of existing mortgage rates and preferential loans for first-home purchases in big cities.

"We will see in the coming months if these supply-side measures are able to revive homebuying demand, which is crucial for the fate of China's developers and their ability to handle their upcoming debt maturities," said Tara Hariharan, managing director at global macro hedge fund NWI Management in New York.

She noted that Country Garden and other developers face payments for sizeable maturities this year.

Shares in Country Garden jumped more than 7% in early trade on Monday, while Hong Kong's Hang Seng mainland properties index rose more than 6%.

In the deal reached after a vote on its proposal late on Friday, Country Garden is now allowed to repay the onshore debt in instalments over three years, instead of meeting its obligations by Sept 2.

It also has another immediate, albeit much smaller, debt payment challenge – the ending of a grace period on Tuesday for last month's missed coupon payments worth a total of US$22.5 million on two offshore dollar bonds.

That Country Garden was able to avert an onshore default has raised hopes it will be able to make the interest payments on those bonds, said three of its offshore creditors, declining to be named as they were not authorised to speak to the media.

After that, the creditors said they expect Country Garden to enter into restructuring negotiations for its entire offshore debt to avoid a "hard default", similar to what it did with the onshore creditors.

Country Garden did not immediately respond to a request for comment.

While China's property industry may have gained some respite, some market participants said they plan to stay away from the sector until there is a rebound in home sales.

"We sold all our Chinese real estate stocks in April 2020 and haven't bought back any since," said Qi Wang, CEO of Hong Kong-based MegaTrust Investment. "Wouldn't touch the private developers with a ten-foot pole right now."