The crash of Country Garden Holdings’ shares to a penny stock is sending shockwaves across the Chinese property sector and the wider economy, less than two years after China Evergrande Group’s default rattled global markets.
The share price of the property developer—originally China’s top developer by sales and still larger than Evergrande—plummeted as much as 5.8 percent to HK$0.98 early Friday at the Hong Kong stock exchange, closing below HK$1 for the first time.
With its operations under increased scrutiny and reeling under liquidity problems, Country Garden dropped over 70 percent since its January peak, making it the poorest performer on the Hang Seng Index during that period. This has reduced its market worth to $3.5 billion, down from an all-time high of about $50 billion in 2018.
Its bonds also fell this week after bondholders did not receive coupon payments by an initial deadline, heightening fears that it will be the next behemoth to default.
Late Thursday, Country Garden revealed that it was expecting a net loss of $621 million to $760 million (45 billion yuan to 55 billion yuan) in the first half of 2023, compared to earnings of $263 million in the previous year. The announcement triggered a downgrade by Moody’s Investors Service.
Country Garden was once known for its large-scale projects in smaller cities and rural areas, as well as its ambitious plans to build a forest city in Malaysia.
However, the company has been hit hard by Beijing’s tightening measures on the property sector, which aim to curb speculation and debt risks. The company has also faced increasing competition from other developers, such as Evergrande Group and Sunac China Holdings Ltd.
While Country Garden’s stock plunge reflects the challenges and uncertainties many Chinese developers face in the current market environment, its market crash on Friday has broader implications.
Penny stocks carry substantial risks as well as the potential for above-average gains, so investing in them demands caution.
Due to the inherent danger, however, few full-service brokerages sell penny stocks to their clients. Many are shares in companies about to go bankrupt, small or new businesses with little or no following, or businesses deeply in debt.
At least three brokerage houses, including HSBC Holding and CLSA Ltd., have already downgraded the stock, reported Bloomberg.
Debt Crisis
The crash implies that Country Garden’s demise may impact the livelihoods of its employees, suppliers, contractors, and customers, as well as the stability of the local markets and communities in which it works.The company’s debt crisis could have repercussions for other developers with similar business strategies or financial difficulties, such as Evergrande Group and Sunac China Holdings Ltd. This may intensify the loan bottleneck and property price fall that has been afflicting the business for some time.
Nevertheless, while Beijing has not announced any official response to Country Garden’s debt woes, it has held a meeting with some developers and discussed their sales and debt situation, according to reports.
This implies that the Chinese Communist Party (CCP) is aware of the severity of the property sector’s debt crisis and is attempting to obtain information and comments from industry participants. However, it is unclear whether Beijing will take any tangible steps to assist or rescue Country Garden or other distressed developers or will continue to let market forces play out.
The CCP has been tightening property regulation and oversight for more than two years to reduce speculation, debt concerns, and housing bubbles.
Beijing has also implemented several policies, including the “three red lines” policy, which regulates developers’ leverage ratios, and the “dual circulation” strategy, which focuses on increasing domestic demand while decreasing reliance on external markets. These rules have placed tremendous pressure on many developers, especially those with high debt levels and low cash flows.
But the CCP has been selective in its intervention in the property sector. For example, while Beijing has bailed out some state-owned developers, such as China Fortune Land Development Co. and China Evergrande Group, it has allowed some private developers, including Fantasia Holdings Group Co. and Modern Land (China) Co., to default on their bonds.
“Up until now, we still see no signs of further government support or bail-out [for Country Garden],” JPMorgan Chase & Co. said in a note, reported Bloomberg.
