Debt Troubles at Country Garden Threaten Global Blight

  • China's insolvent property developers and trust companies pose risks to many global businesses.
  • The U.S. and Spain offer recent examples of real estate bubbles suggesting China might still be in the early stages of its downturn.
  • Restructuring property debt might take years but could eventually unlock attractive investment opportunities.

News of a liquidity crisis at China's largest property developer, Country Garden, has rekindled fears about the scale of the country's real estate problems and potential ripple effects. And Country Garden is not alone. Zhongrong International Trust missed payments to three publicly listed Chinese companies, and its affiliated parent company Zhongzhi's wealth management businesses halted payments to thousands of retail investors.

Another day, another domino

Country Garden is not the first Chinese property developer to face a cash crunch. In September 2021, the country's second-largest developer, China Evergrande, shocked markets when it missed payments on its bonds. Since then, nearly 30 others — representing more than 10% of the 241 publicly listed Chinese developers — have either missed payments, defaulted, or restructured their debt.

The property sector's debt problem early on had involved only external debt (in USD) but has since spread to the onshore market as well. Renminbi bonds are now trading at 20 to 30 cents on the dollar, a level that implies steep losses for local lenders. The sector's ailing cash flows and ballooning leverage appear to justify the bond market's pessimism.

Developers' liabilities have ballooned to US$2T while income has declined to less than US$25B