Country Garden share price and the $200 billion black swan

The Chinese real estate sector has come under intense pressure, leading to many large casualties along the way. The biggest one was Evergrande, the giant company that collapsed in 2021. Many other smaller real estate companies have either collapsed or are on the verge.

Country Garden share price has collapsed

Country Garden stock price, which surged in 2022 has come down to earth as it goes through a major credit crunch. The stock plunged to a low of H$1 on Friday, its lowest level since 2009.

It plunged after the company missed payments on two international bonds worth over $22 million. There are now elevated risks that the company will also sink into administration in the coming months.

Country Garden is a big deal in the Chinese real estate industry. For one, its total liabilities stand at almost $200 billion, which is lower than Evergrande’s $340 billion. Most importantly, for a long time, the company was often seen as the safest developer in the country.

In a statement on Friday, Country Garden said that it could lose about $7 billion in the first half year of the year. It made a profit of over $265 million in the same period in 2022.

The company is fighting numerous headwinds. First, the Chinese government started a crackdown on the real estate sector two years ago. It argued that the measure was necessary to fight the elevated debt levels.

Second, Country Garden is facing challenges as interest rates internationally rise. In the US, interest rates stands at 5.50%, the highest level in more than 22 years. As a result, investors are now more comfortable investing in bonds instead of risky companies. 

Further, the country is battling with a slowing economy. Data published this week showed that the country moved into deflation while exports and imports dropped again in July.

Country Garden is not the only troubled real estate company in China. Sales of firms like Sunac, Shimao, Ynago, Kaisa, and jiangsu Zhongnan have plunged in the past few months.

Buy the Country Garden dip?

Country Garden’s woes will likely continue in the next few months as the company’s liquidity issues continue. For one, there are similarities to how Evergrande’s crisis happened in 2021. 

Therefore, I believe that the shares will continue falling in the coming months even as it sits at the lowest level in more than a decade. For one, there are limited chances that Beijing will intervene since authorities let Evergrande fail. In a note, an analyst at CreditSigts said:

“Given they [Beijing] let Evergrande default, that’s quite a clear signal nothing is too big to fail, but we have seen indirect support over the past couple of years.”

It is also unclear how an intervention would look like since the Chinese economic woes are worse than what official data shows. The youth unemployment rate has soared to the highest level in years.