You're listening to Asia Centric from Bloomberg Intelligence, the podcast that pulls back the curtain non global business so you can invest better across the Pacific realm. I'm Tom Corbett in Hong Kong.
And I'm John Lee. Another domino is falling in China's troubled housing market. Country Garden, once considered a gem among Chinese property builders, is on the knife's edge of default after missing a critical debt payment, stirring a new crisis of confidence in the country's housing market and raising broader questions about its economy.
Country Gardens tumble into distress closely resembles earlier Carnage, a rival, ever Grand, which defaulted on its own debt in twenty twenty one, leaving some asking if other developers are far behind.
What does this latest fiasco say about China's housing market? Why is it happening, what's at stake, who's getting hurt? And how is it going to end.
Let's bring in Christy Hangs, senior equity analyst with Bloomberg Intelligence.
I think Country Gardens event tells us that most of China's private developers could be wiped out.
From the market, and Daniel Fann, senior credit analyst.
If Country Garden defaults, it will be probably marked kind of the end of China property era since two thousand and eight.
Both joining us here in Hong Kong, Christy Dan, welcome.
Thanks for having us going to be here.
Christy. We've had a number of Chinese developers, including Evergrand, collapse over the last two years. But why is the potential default of Country Garden different?
So, first of all, Country Garden has over three thousand projects, you know, and that's already four times Every Grand's number of projects. So if there are issues with unfinished homes, it's just a bigger headache for local governments to deal with because there are just many more projects. And secondly, I think the nature of the two events are very different. When Evergrand went, but the Central Bank can still call it an isolated event is because of its own poor
management and ratless expand. But for Country Garden, it's designated as a high quality developer still by the government in the late twenty twenty two, and you know, it's granted as us to onshore born sales and bank credit lines, yet nine months later is failing to repay a coupont payment and for that to happen to a Country Garden is more detrimental to sentiment, I would say, because it tells you that something's fundamentally wrong in China's housing market,
and that's pushing even formally healthy developers to the brank of default.
From a fixing come perspective, I think Country Garden is important in the sense that it used to be a core holding for many many fund managers. I think that a pornly was rated investment grade as well. I think it may last year, So that makes it very detrimental if Country Garden goes wrong. That's more from a trading or positioning perspective.
So this used to be rated investment grade. You're saying yes and low investment grad I hate to be one of those analyst right now.
But when you consider how quickly Country Garden went into distress Christy Dan, what does that tell you about the nature of their financial situation and China's broader housing market.
The Country guardency event postes questions about the fundamental health of China's housing market. And we have always acknowledged that housing market in China are property developers, they are over leverage, and there's an oversupply in the housing market in China, and there's a lot of access in the system, but that has gone unnoticed when there are a lot of
investment demand scooping or absorbing those oversupply of properties. But when the parties stopped in twenty twenty one and the pricing come down, and when people stop investing, we realize that there is a big problem there. And it is not a cyclical problem that you can wait out for
a few years for things to get better. But we realize that China is facing our structural problems and housing market is going to change in the way that it operates for many years to come, and it's going to be a painful process of adjustments.
Then you'll fan, did it surprise you how quickly Country Garden fell into distrust? Is that something you could have seen coming?
I think yes and no. Yes in the sense that once they are not able to do the sare placement at the end of July, which was a very strong signal about their ability to get refinancing or willingness.
That was the early signal that maybe something wasn't quite right.
That was a confirment signal kind of. I think Christie has made some earlier call about the negativity on the setter. So for Country Garden, because they did a roll over on their syndicated long in July. So given hope that they're able to roll over and then hopefully followed by a Sair placement, then I think they're able to kind of like muddle through for a couple of a few more months before they made the call to delay their cup point payment.
Yeah, and for our side, I think that canary in the coal mine is in early July when we know that contractor sales for Country out And was down fifty four percent year over year in June. And I think some of the media has liken China developers to that business model to a Ponzi scheme, which is, you know, because often developers need to bring in fresh new cells to generate cash in order to surface the construction cost of projects that were sold one to two years ago.
And Country Oda had said before in need twenty eight to thirty billion yar a month to ensure it has enough cash to complete presole properties. Yet we keep on seeing cells falling, you know, sixteen billion, twelve billion, and that's when we started making calls on you know, we need to worry about its liquidity. But I think everything
is unfolding so quickly and suddenly. Timing wise, our best guests was something that might happen late this year or early next year when it's convertible born or dollar born come due.
So Christy, you med an interesting observation. Are you suggesting that they need new sales to fund existing projects?
Yeah, because I think it's the business model of Chinese developers. You know, they are looking at high turnover of their assets, so they will try to make money from contract to sales, and with that money they would invest in new land puzzles to just keep on boosting their land bank and
their top line growth. But suddenly, when sell slum, which is the case when everywhere went bus and the whole industry we had saw thirty percent slum in sALS in twenty twenty two, the problem starts unfolding and we can see that, you know, they're running out of liquidity. A lot of their money is locked on a project level. And then we see, you know, developers failing to repay debt, and it's just keep on spreading to more and more developers.
And that wasn't just for Country Garden, was it. Christie Hung that's true for most China property developers. This idea that as long as they have access to financing, whether it's debt or equity or for sales, they can keep kicking the ball down. They can keep perpetuating their business model once something goes wrong.
Yes, that's very true. And I think, just to be clear, you know, since Everygrand's debacle, there are over sixty other developers that have extended or defaulted on their debts. So there are many privately owned developers that is still soften, and Country Garden is one of the biggest survivor until it's failing to repay is coupon payments.
So back during the global financial crisis, the US and European government saved a lot of banks and companies dean too big to fail? Do you think Country Garden is too big to fail? And will the Chinese authorities come to the rescue with a bailout plan?
So to me, it's too big to fail, and because I've talked about how it's the largest developer by itself in the past six years and a dead crisis is going to put completions of its three thousand projects at risk. But that being said, we don't think Country Garden can count on about by the government because since mid twenty twenty one, since Everygrand's debarcle, the government has stopped sort of rescuing the liquidity of individual developers, and Country Garden
could be no exception. You know, the government's priority is to complete the priestole homes to ensure the livelihood of people, but not to prevent corporate effaults.
And is there an underlying raison for that. Is the government just running out of finances or is it more that the worried about moral hazard risk.
I think both of your reasoning makes sense, and at the end, I think it does make sense if the government doesn't offer a bet or because if you look at the land bank of Country Garden, eighty percent of it is focused on China smaller low tier cities where you know, housing is now very hard to sell and
that's very weak demand in those markets. So even if there is hand out from the government, it is going to only offer temporary liquidity reprieve, but it's not going to change the longer term fate that you know, Country Garden's business model isn't working, and it's due to aufflaor strategic focus on log cities, and I think to the government's point, it might not make sense to throw good money off to pat.
You're listening to Asia Centric from Bloomberg Intelligence. By the way, if you like what you hear, and we hope you do, please rate us on Apple Podcasts, Spotify, Google Podcasts, or wherever you may be listening to us. Of course, more stars are better. Your feedback matters, and we love hearing from our listeners. You know, a lot of the damage may not come from the crisis itself at Country Garden, but in Chinese consumer's reaction to it, because it may
fan the flames of doubt among home buyers. Many you're going to be reluctant to purchase because they lack confidence that Country Garden can deliver. Are we at risk of a feedback loop here? Now that this has happened to a second major developer, Daniel Fan any take on that?
Yeah, I think it's just Tom Westpinal just add to what Christy mentioned. I think we financing is one thing causing the trouble. It's a double mmy weaker sales plus a let lot with financing market. If you're homeowner, first of all, you worry about delivery, and then second of all, you worry about mortgage, so definitely it will burn into consumption. I think an other impact would be like engineering companies. Construction companies that deal directly with developers may also take.
The heat, right and I think that's you know, with the stumming home selves. Adding to what Dan just mentioned, there's also downstream industries that is going to be impacted. You know, look at renovation companies, white goods, furniture, and if there's falling home prices, you can expect there would
be wealth effect on consumption. Consumers are now feeling poorer because home prices are declining and they are less likely to spend, especially on say discretionary items, and that in turns squeeze retail sales, herd corporate earnings, and corporates might consider, you know, it has to cut headcounts, and then that's built over into you know, there's a weaker and player, I'm an outlook in the market, and people are not feeling safe about the income and about their job, so
then they might not be able to commit to buying a property right now. So it's a negative loop, as Tom.
You mentioned, and Chinese consumers are already feeling strapped, and this is coming against a backdrop of almost a cascade of problems. You've got inflation, you've got youth unemployment. So talk a little bit about how the impact and the housing market is dovetailing into all those other factors.
China property is say twenty twenty five percent of China's GDP.
That's a lot.
It's a pillar industry. So if it has a big problem like country guidence event that we're looking at right now, it's going to weigh on sentiment on the Ovoy economy.
So what can the authorities do? The Chinese government has always been able to pull some leavers to restart the economy, to fan the animal spirits. What can they do to save the housing industry?
I think for now we are seeing the government is focused on demand syde policies like easing home purchase restrictions in larger cities, lowering down payment ratios, and cutting mortgage rays. But I think the reality is, you know, people are not buying property because mortgage rate is cheap. They were buying property because they expect home price to appreciate. That's
until the party is over in twenty twenty one. You know, the household mindset about investing in property has changed already, and the government's mentor of housing is for living in, not for expectation, is becoming more and more ingrained in people's mindset, and I think what policy didn't do this round is to address the liquidity problem of any developer. So when buyers continue to see more developers are defaulting,
that's a big damage to confidence. I think it's just very hard to just go with demand side policies to just revive demand and not fix the corporate debt problems that's facing Chinese developers, because the two go hand in hand together to bring up the health of the China's housing mine.
Trying to just lower it's interest rate by fifteen basis points to two point five percent. Look, I think this was the steepest cutting three years. Do you think this is going to have any impact at all?
I think, as I said, I don't think it's going to move the needle in terms of housing market sentiment because people are not buying because mortgage rate is cheap. They are buying property because they expected home price to appreciate, and that was the case in twenty sixteen to twenty twenty, when prices were up for to eleven percent per year, and you know, home price appreciation is just almost like a certainty to people. That's why there's so much investment
going into property. And there's obviously overbuilding of housing in China, and when we see that they're downside to home prices since twenty twenty one, people stop investing those overbuilding of you know, infantry. There's no its demand coming in to absorb them, and that becomes a big problem.
Christy Hang, Daniel Fan. We've seen Chinese regulators step in. There was somewhat of a rescue package in November, and yet still you have a second major developer that's fallen into the stress. How did we get here?
I think on the financing side, the government tried to help, but the structure itself has some issue. I think they did some like three arrows program. The second one is to guarantee onso borns issue by developers. But the problem is developers need to pull up collaterals. As you know, a lot of these developers they are over leveraged already. They don't have a lot of unpledged asset to post a collateral purpose. So that's the reason why the supportive program did not work out that well.
Yeah, to back up dance point, say, for example, a Country Garden, it was able to issue state guarantee bond for about three point five billion in twenty twenty two, and that compared to itself, Slum is down two hundred billion on. So you see the extreme comparison of how littwo bond is able to raise and how sales has
been in a steep decline. That just shows you even though the government filed to support high quality developers like Country Garden back in November during the Rescue Plan, policy support up to this point seems still far from sufficient.
Daniel.
If we can take a step back, country Gardens is still not in technical default. What are the next steps? Can they pull a rabbit out of the hat?
I think yeah, they still have like thirty day great spirit. They're supposed to pay the cubebone on August six, so meaning that like around September six, if they are able to come up with their money, then they are able to resolve this technical default. I'm still a little bit hopeful that they are able to come up with money, or at least come up with some swittener like to ask one extension of the cube on payment, So I think that we will buy them some time to deal
with a bigger problem. And Country gardens demise has had a big impact on equity markets, but arguably it's had an even bigger impact on credit markets. How important is Country Garden to China's credit markets and what's the lasting impact if it were to devote? I think the impact is in that addition to the fact that it's a core holding for many fire managers. Is market share in the ind that is still not small if I remember correctly.
It had a point eight billion of US dollars bond in the China Real Estate Index, which is around like thirty something billion if I remember correctly, So the proportion is not small. And I think more importantly is we don't have other big developers left after Country Garden. We have a bunch of like niche developers, and then we have some soees and a couple of investment grade developers.
So if Country Garden defaults, it will be probably marked kind of the end of China property era since like two thousand and eight something like that.
Well, that's a pretty stark or rather bold take, I would say.
Yeah, So if you imagine, like if Country Garden defaults, we are going back to pre Country Garden era. Country Garden was listed in two thousand and seven, so then if they default, basically we are back to two thousand and six. At that time there were like a handful of developers in the board market.
I think maybe I would like to ask then a question about the slow process of restructuring of bonds for the developers. I say, Everygren's debacle started in mid twenty twenty one, but now were still nowhere in the process of concluding our restructuring, and what is your take on that.
I think there are a few reasons for that. One is to crystallize the total death. I think, for example, Evergrand they announced their twenty twenty two results not that long ago, so you need to have some kind of numbers to form at least the framework of the that
restruction plan. I mean, ideally you're able to do some kind of careful projection to see how much sales you're able to generate, although that's a big academic If you talk about Evergrant's extension plan, the longest one is twelve years, So you're going to do a projection for twelve years, and I don't think it's practical at the current environment.
And the other thing is, given what you have mentioned the outlook of the SETA and we are in a down cycle, some developer may just take the advantage of observing what's happening what others are going to do. At the same time, they are kind of in the place it standstill or some kind of like foremost stand still, meaning that they don't need to pay coupon and the one is going to sue them. There's some cases that develop us are being sue, but in most cases they
are able to get away. So that's another reason for a practical purpose. So all added together, we sees no move in that restructuring.
Christy Dan, what do you both see as far as contagion risk? It could ripple in any number of directions. You've got to exposed bondholders. HSBC and Blackrock are both major bondholders. There's of course other developers, banks, other lenders, creditors, asset managers, property buyers and owners. What do we know about contagion risk? How bad could it be? Who's most at risk? Tell us what you're thinking.
I think within the developers space after country garden biers are going to question you know, can I trust in any private developers in China and the pres projects And therefore, you know, for the small amount of developers that are still left standing, the cells are going to suffer and so as the liquidity and we do expect a second wave of liquidity crisis, and that could wipe out most major players in the private sector in a China property space.
It becomes a toxic feedback loop, doesn't it.
Yes, And if you look at developers like Agile Season, they have even weaker cash coverage of short term debt than Country Garden as of end twenty twenty two, and they're similarly focused on China's low tier city so their liquidity would be something that we'll be watching in the next six months.
I was going to mention Warren Buffett is famous for saying there's never just one cockroach in the kitchen. We've already seen many developers, not just Country Gardener ever Grant tumble into distress. But it's not a stretch. I think others are at risk, as you just mentioned.
I think, yeah, being this way for a second or the impact depends on the situation to the banking sector in an other ways, given the bank's exposure to developers and also like potential delay in mortgage installments on.
So, yeah, Daniel, that's an interesting point. Over the weekend there was news that a major Chinese trust company missed a payment, sparking concerns posed by wealth products issued by I guess the shadow banking sector if you'd like to call it. Is there any relationship between these wealth products and developers.
So, property developers have been big issuers of truts loans and that is one of the major funding channels too, in addition to on shore offshop bonds as well as bank lending. So, as Dan mentioned, you know a big chunk of private developer issuers. They have either extended or defaulted on the debts. The issues with the delinquency of these truts products are going to continue to emerge, and my continuity to see more headlines hitting the market.
Christy, Dan paint the picture for us. How do you both see this drama unraveling? It's not going to stop with Country Garden. Christy, you just suggested, do regulators intervene? Do bankers intervene? What's the endgame? What do you see three six months down the road? Right?
I think country Guidance event tells us that most of China's private developers could be wiped out from the market. And the scary thing is private developers in China account for about sixty five percent of home sales in twenty twenty one, and if most of them cannot survive, you can expect the supply pipeline that is going to come
for China. And I think in the near to medium term you will see a property sector that's predominated by just most these state owned developers, and for perfect developers, that market presence will continue to languish. And I think for housing as a commodity is going to become more and more boring. You know, housing in China that have generated so much investment appeal during twenty one six to
twenty twenty. And for the trends in terms of new home cells, you can see from the example that the US took around seventeen years to make it back to pre crisis level in twenty oh five, and it was like a V shape recovery that happened over seventeen years.
But for China, we think that new home cells likely would never make it back to pre crisis Level's going to be an L shaped and the size of new home cells already shrunk thirty percent in twenty twenty two, and I think I'll just continue to see protracted contraction from here.
That's a pretty downbeat assessment. Daniel Fan, is there any upside for.
Fixing her market? I think it's a little bit difficult to see upside because of the shinking of their market, especially in the higher area. So fund managers basically they may head for two directions. One is fight for quality, so meaning that they will do more investment grapeon, and also they will diversify away from China.
I guess so if properly markets are doing poorly, equity markets are not doing much better, and same with credit markets, then where do investors put their money in China?
I think it's a little bit difficult to justify the core on China. There are already some fund managers looking at Japan and Australia, so make Asia like a bigger Asia. Usually in the past we talk about Asia, it's always Asia is Japan and we don't usually include Australia into the picture. But now it seems the situation is changing. We have a bigger Asia.
Yeah, And I think Shani Wong our analysts covering brokerages and Stephen covering insurance. They have been happening on how we have been seeing more self bound Thlough going into insurance products in Hong Kong because it offers higher you know, related to the US in the US, and we're also seeing more investments into mutual fund products in China.
Christy Daniel, Let's say I'm sitting in the US, I'm listening to this podcast and I'm thinking, well, this is interesting, but this crisis is happening in China. It's far away, but it goes beyond that, doesn't it. The impact is real and the impact goes beyond China's borders. Talk a little bit about that.
I think for US investors, the impact is there, especially for Country Garden because at one point it was investment grade. So there's some US investors they use Country Garden as a protzy to invest in China. So in this scenario, they may need to rethink what they need to do in Asia, including China. China is a bit portant, especially in the physical market for Asia.
Yeah, and a lot of institutional investors are evaluating the case of investing in China. We've been hearing how foreign investors are talking about Chinese these physical properties as something that they wouldn't touch because of just the diet our look in the market, and how it's very hard to liquidate those assets.
And both of you have spent countless hours following this drama researching the financial distress among the developers as it unfolds. Are there any lessons looking back that have come across your mind that we can draw from China's housing crisis.
I was just having a conversation with Dan the other day and we mentioned how we have been reflecting on the policy actions in China in the past eight to ten years. And remember how China opened up on shop on issuance to develop her in twenty fifteen, and that is followed by five years of housing boom. And because developers they have such ease in raising funding, whether it's from the on chopbon market or from the off shop
on market. Because then was talking about how you was close to zero for safe or risk free securities, whereas for Country Garden or other developers, the US are just so appealing, and that attracted a lot of offshore funding for developers too, and with those money, developers they went on shore to buy a lot of land, they speculated on land, land prices jump and therefore home prices jumped, and when investors saw the home presses jumped more appiling
in to invest in property, and that caused the housing brewmen the past five years. And then there came the three Red lines through in two tho nineteen that basically popped the bubble for Evergrand and most of the other private developers that followed. And I think the course of events that is unvoting before us, I would still say that majority of it could be a result of policy actions. So we need to reflect on how policies could come sometimes too late, to bring back the balance in the market.
I feel like we should end this podcast on a positive note. Is there any super lining to this story anyone?
I think if we take policy aside, we locate it as a kind of like cythnical down tern Purely from the financial market perspective, it's not that unpredictable because if you look at the funding situation, the bond issues appeared in twenty nineteen, so in how you market the maturities three to five years, so it's pointing to probably twenty twenty two and twenty twenty four kind of range for maturities, so that is written down like a few years ago.
And the other thing is, as Christie mentioned, the fundamentals over supply versus demand. I think ever since twenty seventeen when also Born market open, a lot of developers they're talking about their the glow that top live three times, so meaning that supplies coming, but at the same time, demand on the hard side is like on the slow side, given if you look at the TTV growth in China,
so that's kind of a mismatched. So now we can draw some kind of conclusion we are very close to a bottom from a cythnical perspective, if there's like eternal run in the macroeconomy, hopeful that we could see a bull market lightly in twenty twenty six to twenty twenty seven.
A little bit of a weight, but our fingers are crossed.
Yeah, And I think in the longer term, we are still positive about housing market in tier one cities or stronger tier two cities like shan Jan Hanjo, and we have been visiting projects. We've been seeing correction in prices in even those largest cities. So I think if you are an investor in the physical market. It's not a bad entry point to consider in the coming one to two years as prices spots home.
We've been talking China's property crisis with Christy Hog and Daniel Fan, both senior analysts with Bloomberg Intelligence. Christy Daniel has been a compelling story and your expertise and your insights have really got a long way toward helping us unschool this and better understand it. And we look forward to following your research and to hearing more from you as it unfolds.
Thank you, Tom, great pleasure to be here.
I'm Tom mccorbett in Hong Kong, and I'm John Lee. This podcast was edited by Clara Chen and you've been listening to the Asia Centric podcast