Another Chinese property giant flirts with default

Chinese property developer Country Garden has been removed from Hong Kong's Hang Seng stock index after saying it expected to post a steep loss and miss bond payments, another sign of China's real estate woes worsening and a threat to oil demand.

Foshan, Guangdong-based Country Garden warned of "significant uncertainties" in bond payments on 16 August after missing payments on dollar-dominated bonds this month, raising investor concerns the company could default on its bonds next month. Earlier in the month it said it expected to post a net loss of about Yn45-55bn in the first half of the year, compared with a profit of around Yn1.91bn a year earlier. Falling profits in its real estate business, increasing impairment of projects due to a decline in sales, and foreign exchange losses are behind the challenges.

The company held net assets of about Yn309.6bn as of the end of 2022 but said it "has encountered the biggest difficulties since its establishment".

Country Garden's competitor Evergrande filed for bankruptcy protection in the US this week as it sought to restructure its debt. Major Chinese investment trust, Zhongrong Trust, which has real estate exposure and which is linked to private conglomerate Zhongzhi Group, has also failed to pay interest and principal on several investment products.

For more than a decade real estate has been a major driver of growth in the Chinese economy, which has itself been a key driver of global growth. The growing signs of a systemic failure of the sector, which has underpinned China's demand for oil, could have ripple effects on both global crude and financial markets. Fitch Ratings said this week it may reconsider its top credit score for China if the government does not step in to support the real estate sector.

Before this year, China's real estate investment growth and oil demand growth were largely correlated (See table). Based on the contraction in real estate investment, however, oil demand ought to be significantly lower. This suggests China could be due an abrupt pullback in purchases of oi; or an increase in refined product exports — unless it is able to store all that surplus crude.

Chinese real estate prices in new construction grew in only 20 out of 70 cities in July, 11 less than the previous month, according to a survey by the national bureau of statistics.

Weak economic data suggests Chinese diesel demand could slow in the coming months with more possible diesel exports. This is despite anticipation of a recovery in consumption in September, when construction activity has historically tended to pick up. Beijing was expected to award fresh export quotas in late-July and many now hope they will materialise in late-August instead.

Chinese diesel exports hit a four-month high in July on weaker than expected demand for diesel. Beijing has adjusted interest rates twice in three months but has refrained from introducing large-scale stimulus to prop up the economy.

Real estate vs oil demand (YTD vs yr earlier) (%)