China’s property debt crisis is deepening, with more companies under scrutiny as debt prices continue to fall. Dollar notes from Country Garden Holdings, China’s largest homebuilder by sales, extended more than a week of losses today to nearly an all-time low, according to Bloomberg-compiled prices.
This latest rout in dollar notes signals that the debt woes of Chinese property developers are worsening, which is also curbing recent optimism that Chinese regulators are pulling back from a year-long crackdown on the sector. Data from Citigroup shows that buyers of 35 projects across 22 Chinese cities have decided to stop paying mortgages, which risks contagion through China’s banking system and economy.
A front-page commentary today in the state-run Securities Times said the debt crisis is starting to affect the middle class and threatens social stability. Avenue Asset Management said the latest news on Chinese homebuyers failing to make mortgage payments is further weighing on investors and could possibly lead to a “Lehman moment” in China as non-performing loans shoot up.
The contagion of China’s property debt crisis is spreading to banks. Citigroup wrote in a report today that non-performing loans, triggered by non-payment of mortgages, could reach 561 billion yuan ($83 billion), or about 1.4% of outstanding mortgage balances. The report warns that “the foregoing of down payments may bring social instability.”
Country Garden dollar bonds have fallen steadily for several months, with declines accelerating in late May after Moody’s Investors Service warned it might strip the builder of its investment-grade credit rating in light of home-sale declines. According to Bloomberg data, Country Garden has $10.8 billion of dollar bonds outstanding, including a $272.4 million note which matures July 25, making it one of the sector’s biggest issuers of such debt. Most of the company’s offshore notes now trade below 40 cents on the dollar, risking further contagion if prices continue to fall.
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