Will the Central Real Estate Time Bomb Explode... What is the Crisis Scenario Triggered by Biguiyuan?

In the Worst Case, Crisis Spreads with Default + Private Companies
Concerns Over Investment Aversion and Distrust in Authorities' Management Capabilities

The crisis surrounding the Chinese private real estate developer Country Garden (Biguoyuan) is spreading, emerging as a potential flashpoint for the Chinese economy. There are concerns that, in the worst-case scenario, it could escalate into a default and lead to a loss of confidence in the government's management capabilities.

On the 16th, according to global financial institutions such as HSBC and JP Morgan Chase, the Biguoyuan crisis could, in the worst case, lead to a default declaration and result in an aversion to investment in private real estate developers within China. HSBC noted in a recent report that if Biguoyuan declares default, market perception will form that investing in Chinese private real estate developers is risky, and this risk could spread to relatively financially stable state-owned enterprises, potentially triggering financial system instability.

[Image source=Reuters Yonhap News]

Previously, Biguoyuan exposed liquidity issues by failing to pay interest on dollar bonds maturing in February 2026 and 2030. The interest Biguoyuan must pay this year amounts to approximately $270 million (about 267.9 billion KRW). Moody's downgraded the company's credit rating on the 10th, citing uncertainty over debt servicing including interest payments, and on the 12th, trading of Biguoyuan's yuan-denominated onshore corporate bonds was suspended on the Shenzhen and Shanghai Stock Exchanges.

This crisis raises concerns as it could trigger a liquidity crisis in China's real estate sector. Generally, when onshore defaults occur, creditors' preventive measures can negatively impact corporate activities and financing, causing uncontrollable problems. Especially with housing demand slowing further in the third quarter compared to before, a default by a major private company adversely affects the purchasing sentiment of potential homebuyers. Of course, if Biguoyuan completes interest repayment within the 30-day grace period, it can avoid default.

If the company declares default, defaults in China's high-yield real estate sector are expected to reach $17 billion (default rate of 29.1%). JP Morgan expressed concerns that this would severely damage investor sentiment.

The market currently views the possibility of Biguoyuan avoiding default as higher. However, considering that bond maturities of $1.3 billion this year, $2.3 billion in 2024, and $5.2 billion in 2025 are approaching consecutively, it is expected to be difficult to maintain debt servicing going forward. Without active government support measures, Biguoyuan may announce a distressed debt exchange plan. HSBC forecasted that this crisis might prompt the Chinese government to take policy measures toward private real estate companies, which could have the long-term effect of guiding the healthy development of China's housing market.

China's real estate market remains stuck in a slump. According to the National Bureau of Statistics, real estate investment in China from January to July decreased by 8.5% compared to the same period last year. Both new construction starts and completed areas also declined by 24.5% and 6.8%, respectively, compared to the same period last year, continuing the sluggish trend.

This content was produced with the assistance of AI translation services.