Country Garden, the biggest private real estate developer in China, is attempting to postpone payment for a privately held onshore bond for the very first time, the latest indication of a crippling cash crunch in the real estate industry that is increasing pressure on China to intervene.
Concerns about contagion risk have been increased by the fact that Zhongrong International Trust Co., a significant Chinese trust business with huge exposure to real estate, has missed several investment product payback commitments.
Analysts said that the second-biggest economy in the world will be further hampered by an increase in trust company defaults, commonly referred to as shadow banks and closely linked to the local real estate market.
Global markets are becoming more concerned about contagion risks, and China's government is under increasing pressure to provide assistance for the struggling real estate industry, which makes up nearly a quarter of the country's GDP.
If Beijing's help does not materialize quickly, Country Garden's troubles, once thought to be those of a more financially stable developer, might potentially cool the market for real estate and financial services, pushing other private developers dangerously near the breaking point.
Since late 2021, the real estate industry has seen declining sales, limited liquidity, and a number of developer bankruptcies, with China Evergrande Group at the center of the financial crisis.
China has struggled to establish a strong post-COVID rebound due in large part to weak domestic and international demand as well as chronic issues in the real estate industry.
Two Chinese listed businesses said over the weekend that Zhongrong International Trust Co. had not paid them for maturing investment products, a move that delivered investors a new blow.
Trust companies, often known as shadow banks, operate free from many of the regulations that apply to banks and distribute the benefits of wealth products provided by banks to developers and other industries that are incapable of directly accessing bank funding.
Concerns over the excessive exposure of shadow banks in China to real estate developers have intensified over the last year as the sector lurched from one crisis to another. China's shadow banks are a $3 trillion business, almost the size of the UK's economy.
In a research note published on Monday, JPMorgan predicted a "vicious cycle" of problems with real estate financing and warned that mounting trust defaults would directly reduce China's growth rate by 0.3 to 0.4 percentage points.
According to another note from Nomura, the most recent wave of defaults by wealth management businesses on trust-related goods is anticipated to have significant ripple effects on the overall economy via wealth impacts in addition to the obvious financial risks and their transmissions.
Critical moment
According to a source with direct information, Country Garden has asked creditors to accept a three-year repayment plan with seven installments for an onshore private bond with a Sept. 2 maturity date and 3.9 billion yuan outstanding.
Country Garden chose not to respond. The developer announced in several documents over the weekend that it would halt trading in 11 of the company's onshore bonds as of Monday, a move that, according to dealers, often indicates intentions to ask for repayment extensions.
Country Garden may have to pay back onshore bonds totaling over nine billion yuan ($1.25 billion) solely in September.
Following a report from Chinese media source Yicai on Friday saying the firm was considering restructuring its debts after missing payments of two dollar bond coupons totaling 22.5 million dollars that were due on August 6, news of the suspension of its onshore bonds came.
The Hang Seng Mainland Properties Index, which fell 3.7%, was negatively impacted by the developer's stock, which fell 18.4% to HK$0.8 on Monday. This month so far, the stock has decreased by 50%.
Offshore bonds from Country Garden also fell, with some of them trading at less than 6 cents on the dollar. Since then, most have somewhat firmed.
Its problems increase the concerns about spillover throughout the real estate market, which is already grappling with low buyer demand.
According to the executive director of Kingston Securities, Dickie Wong, troubles in this industry have been building for a while; it has eliminated the wealth effect amongst investors, and no one is willing to purchase property now.
According to Wong, the sector's influence on the economy is at a "critical moment" and authorities need to take more measures, like significantly lowering reserve ratios and interest rates.
China's economy expanded at a sluggish rate in the second quarter due to weaker domestic and international demand, which prompted top leaders to pledge further policy assistance and experts to lower their growth projections for the year.