A woman walks past Exchange Square which houses the Hong Kong Stock Exchange in Hong Kong on April 27, 2022. (PHOTO / AFP)
The looming default of a Chinese mainland property developer sent shock waves through the Hong Kong equity market, with the trouble in the property sector having a chilling effect on homebuyers and financial institutions, which may further dampen prospects for the mainland’s economic recovery.
The city’s benchmark Hang Seng Index dropped 1.58 percent on Monday to close at 18,773 with a market turnover of HK$104.1 billion ($13.31 billion). The Hang Seng China Enterprises Index, gauging listed mainland companies in Hong Kong, fell 1.52 percent while the Hang Seng Tech Index tumbled 1.79 percent.
Once the mainland’s largest private-sector developer by sales, Country Garden Holdings Co is at risk of joining a slew of defaulters if it fails to make coupon payments on two dollar bonds within a 30-day grace period. On Aug 6, Country Garden missed payment of coupons for two US dollar bonds totaling $22.5 million. Trading of the developer’s 11 onshore bonds worth 15.7 billion yuan ($2.16 billion) was suspended.
Its shares plunged more than 18.36 percent to close at HK$0.8 apiece in Hong Kong on Monday, after closing below HK$1 per share for the first time ever last week.
Bloomberg reported that the developer is seeking to solicit some bondholders’ feedback on a proposal to extend payment of a yuan note due on Sept 2 with amortized disbursements over 36 months. The bond has 3.9 billion yuan of principal outstanding, according to data compiled by Bloomberg.
“The debt troubles at Country Garden and the uncertainty of government support are feeding into broader unease in the mainland housing market. The developer faces a potentially higher liquidity squeeze given its much higher exposure to lower-tier cities. Comparatively, the macro context of the Country Garden crisis is also more precarious,” Oxford Economics warned in its research report.
“Country Garden’s credit distress is likely to spill over to the country’s property and financial markets. Specifically, it is likely to further weaken market sentiment and delay the recovery of the mainland property sector,” Moody’s Investors Service said.
According to Moody’s Investors Service’s data, Country Garden had 357 billion yuan of contracted sales in 2022 focused on property development and investment in the mainland’s lower-tier cities. In addition, it is one of the major issuers in the US dollar bond market, with outstanding US dollar bonds of around $10 billion.
“Hong Kong stock market performance in the short-run period depends on how fast the default crises of mainland developers could be contained,” said Conita Hung, investment strategy director at Tiger Faith Asset Management.
“Whether the United States can really cut interest rates or whether the Chinese mainland can slash the bank’s reserve requirement ratio are still the factors to affect the trend of the Hong Kong equity market, but all that has to be dependent on the respective economic data in the US and the Chinese mainland,” Hung noted. “These are still the fundamental factors to gauge.”
CCB International said in its Hong Kong market liquidity report, “Liquidity conditions remain somewhat favorable to the HSI, but fundamentals and investor confidence may be larger factors for market momentum at this juncture.”
