Concerns about Chinese economy deepen amid Country Garden woes

(Alliance News) - The week opened with some worrying news from Asia's largest economy, as Chinese property firm Country Garden warned of multi-billion dollar losses, and missed bond payments.

The update deepened concerns over the nation's heavily indebted real estate sector.

The firm has long been deemed financially solid but was unable last Monday to make two bond payments, and after a 30-day grace period, the company risks defaulting in September if it still cannot pay.

Country Garden announced over the weekend it would suspend trading of onshore bonds from Monday, a decision likely to cause concern in the markets as the company said its debt was estimated at some CNY1.15 trillion, or USD159 billion, at the end of 2022.

Like heavily indebted competitor Evergrande, any collapse of Country Garden would have catastrophic repercussions for the Chinese financial system and economy.

Once China's largest real estate company, Evergrande was found in 2021 to be drowning in more than USD300 billion in liabilities, sparking a nationwide property crisis that had global ramifications. The failure to complete housing projects have resulted in widespread protests and mortgage boycotts from homebuyers.

"There had been high hopes that stimulus from the central bank might bolster the fragile state of the sector, but policies have underwhelmed investors and have failed to quell continuing troubles across the property landscape which risk spreading to other sectors," said Susannah Streeter, Hargreaves Lansdown's head of money & markets.

Indeed, there are already signs of trouble at one of China's largest wealth managers.

According to a Bloomberg report, several corporate clients of Zhongzhi Entreprise Group Co, which manages around CNY1 trillion, disclosed overdue payments by a trust unit.

Bloomberg sources said China's banking regulator has set up a task force to examine risks at Zhongzhi, in a sign of concern over potential contagion.

The developments in recent days are being received in the context of weak Chinese economic data. Last week's trade figures pointed to the biggest drop in exports for more than two years.

Further, the country's economy slipped into deflation last month for the first time in two years. Many commentators took this as a signal that the Chinese government may step in to provide stimulus, and it was due to a weakness in consumer spending.

The fall in headline CPI was largely down to a fall in food prices, with large swings in pork prices stemming from the effects of a heatwave last year. The core inflation data, excluding food and energy, edged up slightly in July from the prior month.

Capital Economics considered a "more troubling conclusion" to the premise of it being due merely to weak consumer demand, or even short-term external market shocks.

"The primary issue may not be a cyclical weakness of demand that can be remedied by policy support. Instead, it seems more likely to be chronic supply-side problems that will pull down China's growth rate over many years and can only be addressed through structural reforms rather than monetary and fiscal stimulus," said Capital's chief economist Neil Shearing.

Among the structural issues facing China, Shearing points to its falling birth rate and demographic challenges. He also cites over-investment and not letting the market "do more of the work in allocating resources" as potential causes for a slowdown in economic growth.

"A combination of policy support and base effects mean these latest signs of deflation in the official numbers will be likely gone before year-end. China will be living with its structural supply-side issues for a lot longer."

For now, there will be further data for investors to consider on Tuesday, with industrial output, retail sales and fixed asset investment due overnight. House prices follow on Wednesday.

By Elizabeth Winter, Alliance News senior markets reporter

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