Country Garden (HKG: 2007) and Country Garden Services (HKG: 6098) are both down again today. C Garden by 13%, Services by 10%. This is on top of yesterday’s declines in both versions of Country Garden: “Country Garden (HKG: 2007) and also Country Garden Services (HKG: 6098) - so that’s CG both plain and simple - are down in the 7 and 8% range today. Over the weekend the western press published more worries about the bond prices of the group. But that’s more likely a reaction to rather than a cause of moves in Hong Kong shares. What’s really happening here is that we all face great uncertainty over how the China property market is going to turn out. So, there’s a great deal of volatility in property group share prices as views change and twist and turn in the wind.”
The basic background here is that the bond prices are shrieking that Country Garden (both versions) is bust. One day just recently the $ bonds were trading at 20% of par. That’s not just akin to Chapter 11 value (not that China calls it that but…) that’s below the usual sort of range we’d expect in a Chapter 7, or liquidation. Yes, there’s muttering that one of the onshore bonds is being paid early. But that’s onshore.
Country Garden Holdings share price from Google Finance
The basic background here is very simple indeed. The China property market is horribly overbuilt, disastrously financed with way too much debt in the system and not enough capital. Well, sorta - all of that is true under the current macroeconomic policies and with reference to the current restrictions upon bank lending into the sector and so on. So, there are two options for the future of the sector.
The first is that current policies continue and those problems work their way through the system. Country Garden - with the already happened exit of Evergrande as a major player - as the bellwether stock of the sector will suffer badly. To the point that we’d almost certainly expect bankruptcy of some form in the not too distant future.
The second is that policy changes and the sector reflates. We’ve seen some indications of policy change from the Politburo of the CCP. But quite how much that’s going to feed through into marketplace reality is uncertain. China property stocks jumped on the news of that change and have then been declining since.
The bet on Country Garden, as it is on the rest of the China property market, is what does the government want to happen here? A clear out and purge of the sector? Or a return to a boom? And once we’ve worked that out, will they get policy right enough to achieve their aim?
