Remember China Evergrande, that Chinese real estate behemoth whose mountain of debt sent global markets spiraling in 2021? Its collapse signaled the start of a crisis for China’s housing market, where sales of apartments ground to a halt and developers big and small found themselves unable to pay their bills.
Now, financial troubles at Country Garden, another real estate giant, are raising fresh concerns. They are also a flashing warning sign about China’s economy.
Country Garden, the country’s biggest developer by sales, has been pummeled in the markets twice in the past week. Investors are panicked by two events: On Aug. 1, the company scrapped a plan to inject cash into the business, something it needs. This week, it missed two interest payments on bonds. The bond payments, which are owed in U.S. dollars, are relatively small in value, but by missing them, the company put itself at risk of default.
Country Garden’s market value has been more than halved since the start of the year. Traders were swapping some of its bonds for as little as 10 cents on the dollar this week, a sign of doubt that they expected to be paid back in full.
ekw88 on August 11st, 2023 at 22:14 UTC »
Their government has stated the intention at not kicking the can down the road and letting market forces correct these companies to pay the cost now rather than later. Governments, banks and property developers alike won’t be expecting aggressive recovery policies as seen in 2008 across the globe. It comes at a good time when every other country is struggling economically so opportunities do not flood out unimpeded.
As the CCP sets the perimeter to avoid economic fires from spreading beyond its intended scope, they are ready to deal with the pain now to avoid a larger one in the future. Geopolitically they want to be the longest player in the game, and I suppose it is indeed better to let it deflate now than later.
QuietRainyDay on August 11st, 2023 at 16:30 UTC »
This kind of deflationary debt crisis was inevitable after the CCP refused to let China's economy grow more organically.
Massive investments and industrialization through the 2000s should have been followed by higher consumption growth, growth in the service sector, and TFP growth.
China needed financial market liberalization, loosening of capital controls, stronger social safety nets, higher wages, stronger currency, and lower trade surpluses. All things that would have boosted domestic consumption, allowed credit to flow more organically, etc.
But the geniuses in the CCP couldnt wrap their heads around the fact that endless investment and artificially depressed consumption isnt actually good. They have the economic principles of a Redditor that failed high school economics: consuming bad, big factories good. And when they couldnt build any more factories they started channeling their excessive investment into housing.
Over-investment, rapid credit growth, and weak TFP growth always have one inevitable outcome: debt crises.
You cant prevent it with slogans, ideology, and repression. As it turns out, economics is real and some economic ideas are wrong while others are right.
Admirable_Custard608 on August 11st, 2023 at 14:22 UTC »
China’s real estate market continues to suffer as another real estate giant – Country Garden – has just missed two interest payments on bonds. Investor – debtholders in particular - panicked and they’re now trading its bonds at 10 cents on the dollar, a sign that they do not expect to be repaid.
For some time, the Chinese authorities designated it as a model developer. Last year, it made 50 billion in sales.
Country Garden’s equity is down more than 50% since the start of the year, despite some modest recovery in July as the government tried to prop up the sector. Traders were swapping some of its bonds for as little as 10 cents on the dollar this week, a sign of doubt that they expected to be paid back in full.
The overall macro economic picture is in tatters. Home sales were down in the first half of the year, a decline that accelerated last month. One in five young Chinese is out of work. People are not spending money, leading companies to slash prices. "In smaller cities, where Country Garden continues to build its sprawling residential complexes, authorities are facing an oversupply of housing and a steady decline of population."
Investors fear contagion from Country Garden’s deepening troubles. Shellshocked creditors who have continued to lend to developers might think twice before giving them more money. Home buyers may stay away from a company on the precipice of collapse. They’ve seen this movie before.
The scary part is that the CCP's social contract is predicated on bringing economic prosperity in exchange for foregoing political and civil freedoms. In the past few years, the party has become more oppressive as economic growth dwindles first, and then eventually disappeared. What happens when stagnation officially hits people's pockets and the youth's broken dreams?