Country Garden debt deal, China property support moves trigger relief rally

Country Garden's deal with creditors for an extension on onshore debt payments worth US$536 million (about RM2.5 billion) boosted shares in the developer on Monday and gave China's crisis-ridden property sector some much-needed respite.

Country Garden shares ended 14.6% higher after having jumped as much as 19% to their highest level since Aug 10. Hong Kong's Hang Seng mainland properties index climbed as much as 10%.

Global shares also rose on Monday, lifted partly by hopes that China's steady drip feed of policy stimulus might stabilise the world's second-biggest economy, which has seen its post-pandemic recovery falling away quickly as the property sector cash squeeze worsened.

But while Country Garden investors may be heaving sighs of relief, it remains to be seen whether a raft of stimulus measures will help revive property demand soon, ease the sector's cash squeeze and lift the gloom over the wider financial system.

Beijing on Monday added to a series of policy measures in recent months to revive its economy, approving the setting up of a special bureau to promote the development and growth of the private economy.

The private sector is responsible for 80% of new urban jobs, but has struggled to attract investment amid a frail economic recovery over the first half of the year, with business owners also constrained by weak domestic demand.

Carlos Casanova, senior economist for Asia at UBP, said that markets rallied after authorities showed that they were taking bigger steps in the last few days to support the property sector.

"Although these are positive measures for sentiment, which should help to stabilise real demand for homes, the sector is not entirely out of the woods yet," he said, adding developers' bond defaults were "artificially low" as Beijing tries to defuse the debt risks in an orderly manner.

The worsening financial woes of Country Garden have further highlighted the fragile state of the country's real estate industry, which accounts for roughly a quarter of the economy and whose debt situation has been dire since 2021.

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

Country Garden later also announced a 48.9 billion yuan first-half loss, a record for the developer.

In the past few weeks, 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.

Country Garden itself faces 108.7 billion yuan worth of debts due within 12 months.

In the deal reached late on Friday, a day before the developer had been due to repay its onshore debt worth US$536 million, the company will pay its obligations in instalments over three years.

Restructuring talks

The developer, however, is facing a call from some smaller onshore bondholders for the nullification of a deal to extend repayment of a bond, arguing it was unfair and illegal, according to sources and a document.

In a letter opposing the deal, which the sources said has been sent to Country Garden and seen by Reuters, some creditors complained the procedures of the bondholder meetings were unfair and in breach of rules and laws.

Country Garden declined to comment.

Besides the onshore debt extension deal, Country Garden has also wired interest payments tied to a RM100 million bond that was due on Sept 2, said a source familiar with the matter.

The source asked not to be named due to the sensitivity of the matter.

The developer has another impending 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 it was able to avert an onshore default with the extension deal has raised hopes it will be able to make the interest payments on those bonds, said three of its offshore creditors.

The bondholders declined to be named as they were not authorised to speak to the media.

After making the interest payments by Tuesday, 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.

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 10-foot pole right now."