Chinese Real Estate Turmoil: Private Companies Show Declines as State-Backed Shares Rise

• 20 August 2023
• International News
• 2079 Views

China’s property sector experienced a tumultuous start to the week as prominent developer Country Garden Holdings plummeted to a record low, triggering a chain reaction of declining property shares. The crisis unfolded on Monday 14 August, causing Country Garden’s stock to nosedive by 18.4% to HKD 0.80, echoing the company’s weekend announcement of suspending trading in 11 onshore bonds with a combined face value of approximately CNY 16 billion ($2.23 billion).

This alarming development reverberated through the financial markets, with Hong Kong’s Hang Seng Index shedding 1.58% to 18,773.55, and China’s CSI300 index experiencing a 0.7% drop to close at 3,855.91 on 14 August 2023, in response to these pivotal events, as per the Nikkei Asia press release.

Country Garden’s President, Mo Bin, stated in a filing that the company is grappling with its most significant challenges since its inception, attributing the difficulties to a confluence of factors, including dwindling sales and a challenging refinancing landscape that led to liquidity constraints.

This unsettling news illuminated the broader struggles within the sector, with Guangzhou R & F Properties, another Hong Kong-listed developer, witnessing an 8.3% drop to HKD 1.11 on Monday. The company’s sobering revelation of a 49% year-on-year decrease in monthly contracted sales from January to July, coupled with an 80% plunge from the same period in 2021, highlighted the industry’s distress amidst China’s ongoing property crisis.

Furthermore, other prominent real estate players are not immune to the crisis. Guangdong-based developers encountered additional setbacks as a local Guangzhou court classified one of them as a “discredited debtor” for failing to meet repayment obligations. Shanghai-based Zhongliang Holdings Group’s Chairman, Yang Jian, disclosed the harsh effects of an unfavorable macro environment and the downturn in China’s real estate sector on the company’s gross profit margin, contributing to a 1.2% dip to HKD 0.43 on Monday.

However, the turmoil in the sector has demonstrated a stark contrast between private developers and those with state affiliations. Notably, Shanghai-listed Poly Developments and Holdings Group managed a 0.4% gain on Monday, closing at CNY 14.01. The company’s resilient performance can be attributed to its robust year-on-year increase of 10.1% in contracted sales during the first seven months of the year, amounting to CNY 267.82 billion. Poly’s consistent acquisition of land rights, coupled with projected revenue and net profit growth of 25% and 11%, respectively, for the first half of the year, has solidified its position as the leading developer amid the ongoing crisis.

Similarly, state-owned China Merchants Shekou Industrial Holdings experienced a 1.6% upswing in Shenzhen on Monday, closing at CNY 13.72. The unit of the state-owned China Merchants Group reported a substantial 30.7% year-on-year rise in contracted sales for the first seven months, amounting to CNY 186.56 billion. An additional CNY 2.42 billion investment in land rights in Shanghai and Hangzhou further highlighted the company’s resilience in a challenging market.

Analysts point to the favorable performance of companies with state ties, exemplified by Poly Developments, as evidence of the advantages conferred by their “central company” background – referring to their direct association with influential state-owned conglomerates, as noted by Jin Luyu, an analyst at Industrial Securities.

The volatile events of 14 August 2023, underscore the fragility and complexity of China’s property market, where the fortunes of different companies are shaped by a mix of economic policies, market positioning, and global economic trends.

• Analysis