Country Garden shares, dollar bonds jump on financing aid hopes

BEIJING – Country Garden Holdings’ shares and bonds jumped as news that the distressed Chinese builder will make it onto a draft list of firms eligible for financing support relieved concerns over liquidity woes.

Shares in Hong Kong rallied 24 per cent on Nov 23 to cap their best day in a year. Its 5.625 per cent dollar bond due 2030 gained another 10 per cent after jumping 40 per cent in the previous session, according to Bloomberg-compiled data. The developer’s dollar notes still trade around eight cents on the dollar, a deeply distressed level. A gauge tracking property developer shares advanced almost 9 per cent.

The authorities have been taking more forceful steps to end the nation’s property crisis, with the expected inclusion of Country Garden in the so-called “white list” showing Beijing’s pivot towards helping troubled builders. Country Garden’s plunge into default in October shook investor confidence as it showed few builders will be spared from the years-long housing market slump plaguing the economy.

China’s plan “underscores the importance it places on developers completing projects, and will help reassure suppliers, workers, and home buyers amid ongoing financing challenges”, said DBS Group Holdings strategist Chang Wei Liang. “Debt investors could still face risks of restructuring, but there is some relief if financing helps to ward off risks of liquidation.”

Sino-Ocean Group and CIFI Holdings Group, which have also missed debt payments, are among the 50 developers on the list, Bloomberg reported on Nov 22. Regulators are set to finalise the roster and distribute it to banks and other financial institutions within days, according to people familiar with the matter.

Country Garden, once the country’s largest builder by contracted sales, in October posted its biggest sales drop in at least six years. The slump raised concerns among potential buyers of its ability to complete projects amid a cash crunch. Sales are hovering around a sixth of their average monthly level in 2021 and 2022.

With a 50 per cent rally in November, the stock closed just above HK$1 on Nov 23. Sustained gains will help Country Garden shed its penny stock status, although prices remain a fraction of the 2018 peak at more than HK$17. The gains in November track a broad uptrend in developer shares amid signs that support for the sector is broadening.

The Bloomberg Intelligence gauge of Chinese developers got another boost on the afternoon of Nov 23 as Bloomberg reported China may allow banks to offer unsecured short-term loans to qualified developers for the first time. The index has gained nearly 18 per cent in November.

“Most developers in China face a liquidity rather than solvency crisis, meaning they can survive if the government provides enough financing cash flows,” said Mr Gary Ng, senior economist at Natixis in Hong Kong.

As part of a package of new measures to backstop the real estate industry, regulators are considering allowing banks to issue so-called working capital loans to some developers, sources said, asking not to be identified discussing a private matter. Unlike other types of loans available to builders that typically require land or assets as collateral, the new financing facility would be unsecured and available for day-to-day operational purposes, potentially freeing up capital for debt repayment, the sources said.

Officials are also weighing a mechanism that would allow one lender to take the lead in supporting a specific distressed builder by coordinating with other creditors on financing plans, the sources said.

Implementation would require regulators to exempt bankers from being held accountable for possible bad loans given the high risks involved, the sources said, adding that deliberations are ongoing and subject to change.

The National Administration of Financial Regulation did not respond to a request for comment.

If the support measures are approved, they would represent China’s most forceful attempt yet to plug an estimated US$446 billion (S$597.7 billion) shortfall in funding needed to stabilise the industry and deliver millions of unfinished homes. President Xi Jinping is also stepping up support for the broader economy, with moves this week indicating increased urgency to stop a downward spiral in the property sector from derailing growth and endangering financial stability.

A Bloomberg Intelligence gauge of developers surged as much as 8.2 per cent on Nov 23, while dollar bonds of some real estate companies have soared this week as investors bet on more policy action.

Meanwhile, China’s top lawmaking body said on Nov 22 that banks should increase funding for developers to reduce the risk of additional defaults and make certain that housing projects get completed.

While the working capital loans may ease the industry’s near-term funding challenges, it is unclear how they will ultimately impact developers’ ability and willingness to repay creditors, especially offshore bondholders who have already suffered billions of dollars in losses. Shifting more of the burden to lenders also comes with risk.

China’s US$57 trillion banking industry has already been battling with shrinking margins and record piles of souring loans, as the authorities have steadily increased pressure on lenders to shore up the economy and the property sector. Net interest margins at commercial banks dropped to a record 1.73 per cent at the end of September, below the industry’s 1.8 per cent threshold seen as necessary to maintain a reasonable amount of profitability.

Outstanding property loans at the end of September fell on a yearly basis for the first time, underlining caution at the banks. At a meeting with top financial regulators on Nov 17, China’s biggest lenders, brokerages and distressed asset managers were told to meet all “reasonable” funding needs from property firms. BLOOMBERG