Country Garden, one of the largest developers unaffiliated with the state as far as sales are concerned, has allegedly failed to make two coupon payments on dollar bonds that were due on Sunday. At the same time, Reuters reported that Dalian Wanda's senior vice president, Liu Haibo, has been taken into custody by the police as the company is carrying out an internal investigation concerning corruption.
Two years after Evergrande's debt woes, concerns over China's property market are resurfacing. Reuters reported that Country Garden, one of the biggest non-state-owned developers as judged by sales, missed two coupon payments on dollar bonds due on Sunday. When asked, the firm did not provide a comment to CNBC. In addition, Reuters stated that Dalian Wanda's Senior Vice President Liu Haibo was apprehended by police after an internal anti-corruption inquiry. Again, Dalian Wanda were not available to respond to CNBC's request for comment. The Hong Kong listed shares of Country Garden were down 1.7% on Wednesday, after similar falls earlier in the week. According to Sandra Chow, co-head of Asia Pacific Research for CreditSights (owned by Fitch Ratings), "With China's total home sales in 1H23 down year-on-year, falling home prices month-on-month across the past few months and faltering economic growth, another developer default (and an extremely large one, at that) is perhaps the last thing the Chinese authorities need right now."
The Country Garden investor relations representative neither confirmed nor refuted the claims of missed payments, the Chow-led team observed in their Tuesday report. This had a negative influence on the sentiment towards Longfor, another non-state-owned developer, whose shares rose around 0.8% Wednesday, after trading 1% down during the day. The analysts added that this would likely affect the outlook of homebuyers.
Despite signals from China's top leaders in late July that point to a shift towards greater support for the real estate market, the market as a whole has stayed sluggish. Worries still linger in regards to how changes to home prices may be factored in. As Nomura analysts noted in an Aug. 4 report, the lifting of restrictions on property in larger cities could divert demand from the smaller ones, which make up 70% of new home sales in the nation and are largely responsible for driving up the demand for commodities and construction.
The report noted that there is worry that simply loosening the rules on current home sales without also releasing limits on home buying may fuel a supply increase and have a negative effect on house prices. Chinese government officials have sought to control the huge and thriving real estate market by focusing on reducing the use of debt-financing for investors and developers since a few years ago. Evergrande defaulted in late 2021, as did other businesses with substantial debt.
Many people last year suspended mortgage payments following a postponement in receiving the houses they had purchased. Most apartments in China are sold before they are built. According to analysts from Rhodium Group in a report released this week, "With the decrease of trust, the private real estate sector will probably remain as a hurdle for the nation's advancement for the rest of the year." They featured that new beginnings in residential construction have been declining for 28 months consecutively. Real estate and linked industries have made up about a quarter of China's economy. Redmond Wong, market strategist at Saxo Markets Hong Kong, noted that it would be “extremely difficult, if not impossible” for Country Garden to refinance; other Chinese developers will also have trouble raising funds, particularly overseas. Since the start of the deleveraging campaign in 2016, it is improbable that the state will step in to bailout real estate developers. According to Wong, "the most likely way for Country Garden or Chinese developers encountering similar situations to avoid default will be through asset liquidation."
Despite the overall real estate slump, China's state-owned developers have tended to fare better than other builders. Country Garden has experienced the worst sales performance among the nation's top 10 property developers in the current year, reporting a decrease of 39% compared to the same period of the prior year, according to research results put out by E-House Research Institute.
Vanke was the only other developer among the 10 to see a year-on-year decline in sales for the period from January to July, decreasing by 9%, as the research showed. The other names were mostly state-owned; for instance Poly Development, which recorded a 10% sales growth during the same time, as per the analysis. Despite this, there has been little impact on home prices in general. Nomura mentioned in a separate report that the average existing home prices went down by 2% in July from the preceding month, worse than the 1.4% dip in June, based on a Beike Research Institute data sample of 25 large cities. The July figure is 13.4% below the peak from two years ago, as the Nomura report said.
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According to Nomura, the seven-day moving average of new home sales as of Aug. 6 had dropped by 49% in comparison to 2019, which is even more severe than the 34.4% decrease registered in the earlier week. As property absorbs a greater portion of Chinese households' wealth than is typical in many other countries, capital restrictions make it hard for those in China to invest abroad, and the local financial markets are still less mature than those in developed countries. Last week Liqian Ren, the leader of quantitative investment at WisdomTree, explained in an interview, "People are currently assessing what stands to be a great investment in the future. Beginning with last year, individuals have started to perceive that real estate prices won't be escalating. I don't presume it's the lack of faith. Many people still preserve money in the bank." — CNBC's Hui Jie Lim contributed to this report.
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