WEBVTT - Country Garden on the Brink 0:00:02.560 --> 0:00:06.880 You're listening to Asia Centric from Bloomberg Intelligence, the podcast 0:00:06.960 --> 0:00:09.880 that pulls back the curtain non global business so you 0:00:09.960 --> 0:00:14.000 can invest better across the Pacific realm. I'm Tom Corbett 0:00:14.080 --> 0:00:15.080 in Hong Kong. 0:00:15.160 --> 0:00:18.560 And I'm John Lee. Another domino is falling in China's 0:00:18.600 --> 0:00:22.760 troubled housing market. Country Garden, once considered a gem among 0:00:22.880 --> 0:00:26.040 Chinese property builders, is on the knife's edge of default 0:00:26.120 --> 0:00:29.800 after missing a critical debt payment, stirring a new crisis 0:00:29.840 --> 0:00:33.120 of confidence in the country's housing market and raising broader 0:00:33.200 --> 0:00:34.440 questions about its economy. 0:00:34.560 --> 0:00:39.400 Country Gardens tumble into distress closely resembles earlier Carnage, a rival, 0:00:39.440 --> 0:00:42.160 ever Grand, which defaulted on its own debt in twenty 0:00:42.240 --> 0:00:48.400 twenty one, leaving some asking if other developers are far behind. 0:00:47.920 --> 0:00:51.080 What does this latest fiasco say about China's housing market? 0:00:51.440 --> 0:00:54.600 Why is it happening, what's at stake, who's getting hurt? 0:00:54.880 --> 0:00:56.120 And how is it going to end. 0:00:56.240 --> 0:01:00.960 Let's bring in Christy Hangs, senior equity analyst with Bloomberg Intelligence. 0:01:01.160 --> 0:01:04.240 I think Country Gardens event tells us that most of 0:01:04.400 --> 0:01:07.199 China's private developers could be wiped out. 0:01:07.080 --> 0:01:10.039 From the market, and Daniel Fann, senior credit analyst. 0:01:10.240 --> 0:01:15.120 If Country Garden defaults, it will be probably marked kind 0:01:15.200 --> 0:01:18.600 of the end of China property era since two thousand 0:01:18.640 --> 0:01:18.959 and eight. 0:01:19.160 --> 0:01:23.279 Both joining us here in Hong Kong, Christy Dan, welcome. 0:01:23.040 --> 0:01:24.840 Thanks for having us going to be here. 0:01:25.240 --> 0:01:28.679 Christy. We've had a number of Chinese developers, including Evergrand, 0:01:28.840 --> 0:01:31.399 collapse over the last two years. But why is the 0:01:31.440 --> 0:01:33.759 potential default of Country Garden different? 0:01:34.360 --> 0:01:37.640 So, first of all, Country Garden has over three thousand projects, 0:01:37.680 --> 0:01:40.120 you know, and that's already four times Every Grand's number 0:01:40.160 --> 0:01:43.440 of projects. So if there are issues with unfinished homes, 0:01:43.440 --> 0:01:46.360 it's just a bigger headache for local governments to deal 0:01:46.400 --> 0:01:49.720 with because there are just many more projects. And secondly, 0:01:49.760 --> 0:01:52.400 I think the nature of the two events are very different. 0:01:52.920 --> 0:01:55.560 When Evergrand went, but the Central Bank can still call 0:01:55.600 --> 0:01:58.320 it an isolated event is because of its own poor 0:01:58.400 --> 0:02:03.520 management and ratless expand. But for Country Garden, it's designated 0:02:03.520 --> 0:02:06.840 as a high quality developer still by the government in 0:02:06.880 --> 0:02:10.440 the late twenty twenty two, and you know, it's granted 0:02:10.440 --> 0:02:13.000 as us to onshore born sales and bank credit lines, 0:02:13.080 --> 0:02:16.360 yet nine months later is failing to repay a coupont 0:02:16.400 --> 0:02:19.000 payment and for that to happen to a Country Garden 0:02:19.120 --> 0:02:22.359 is more detrimental to sentiment, I would say, because it 0:02:22.480 --> 0:02:26.560 tells you that something's fundamentally wrong in China's housing market, 0:02:26.639 --> 0:02:30.240 and that's pushing even formally healthy developers to the brank 0:02:30.240 --> 0:02:30.840 of default. 0:02:31.560 --> 0:02:34.480 From a fixing come perspective, I think Country Garden is 0:02:34.520 --> 0:02:37.000 important in the sense that it used to be a 0:02:37.120 --> 0:02:41.520 core holding for many many fund managers. I think that 0:02:41.600 --> 0:02:44.679 a pornly was rated investment grade as well. I think 0:02:44.720 --> 0:02:48.520 it may last year, So that makes it very detrimental 0:02:48.760 --> 0:02:52.680 if Country Garden goes wrong. That's more from a trading 0:02:52.840 --> 0:02:54.200 or positioning perspective. 0:02:54.400 --> 0:02:57.120 So this used to be rated investment grade. You're saying 0:02:57.440 --> 0:02:59.720 yes and low investment grad I hate to be one 0:02:59.720 --> 0:03:00.960 of those analyst right now. 0:03:01.480 --> 0:03:05.320 But when you consider how quickly Country Garden went into 0:03:05.400 --> 0:03:08.560 distress Christy Dan, what does that tell you about the 0:03:08.639 --> 0:03:15.280 nature of their financial situation and China's broader housing market. 0:03:15.480 --> 0:03:19.400 The Country guardency event postes questions about the fundamental health 0:03:19.600 --> 0:03:23.160 of China's housing market. And we have always acknowledged that 0:03:23.480 --> 0:03:26.720 housing market in China are property developers, they are over leverage, 0:03:27.040 --> 0:03:29.760 and there's an oversupply in the housing market in China, 0:03:29.880 --> 0:03:32.400 and there's a lot of access in the system, but 0:03:32.520 --> 0:03:34.400 that has gone unnoticed when there are a lot of 0:03:34.440 --> 0:03:39.320 investment demand scooping or absorbing those oversupply of properties. But 0:03:39.400 --> 0:03:42.560 when the parties stopped in twenty twenty one and the 0:03:42.600 --> 0:03:46.040 pricing come down, and when people stop investing, we realize 0:03:46.040 --> 0:03:47.840 that there is a big problem there. And it is 0:03:47.880 --> 0:03:50.440 not a cyclical problem that you can wait out for 0:03:50.440 --> 0:03:52.720 a few years for things to get better. But we 0:03:52.800 --> 0:03:56.600 realize that China is facing our structural problems and housing 0:03:56.640 --> 0:03:58.760 market is going to change in the way that it 0:03:58.800 --> 0:04:01.160 operates for many years to come, and it's going to 0:04:01.200 --> 0:04:03.160 be a painful process of adjustments. 0:04:03.400 --> 0:04:06.160 Then you'll fan, did it surprise you how quickly Country 0:04:06.200 --> 0:04:08.400 Garden fell into distrust? Is that something you could have 0:04:08.400 --> 0:04:09.000 seen coming? 0:04:09.960 --> 0:04:12.760 I think yes and no. Yes in the sense that 0:04:13.000 --> 0:04:16.160 once they are not able to do the sare placement 0:04:16.320 --> 0:04:18.920 at the end of July, which was a very strong 0:04:18.960 --> 0:04:22.760 signal about their ability to get refinancing or willingness. 0:04:23.040 --> 0:04:26.200 That was the early signal that maybe something wasn't quite right. 0:04:26.360 --> 0:04:30.080 That was a confirment signal kind of. I think Christie 0:04:30.120 --> 0:04:34.200 has made some earlier call about the negativity on the setter. 0:04:34.800 --> 0:04:38.880 So for Country Garden, because they did a roll over 0:04:39.080 --> 0:04:42.160 on their syndicated long in July. So given hope that 0:04:42.160 --> 0:04:45.760 they're able to roll over and then hopefully followed by 0:04:45.839 --> 0:04:48.640 a Sair placement, then I think they're able to kind 0:04:48.680 --> 0:04:51.080 of like muddle through for a couple of a few 0:04:51.120 --> 0:04:55.040 more months before they made the call to delay their 0:04:55.160 --> 0:04:55.920 cup point payment. 0:04:56.800 --> 0:04:59.200 Yeah, and for our side, I think that canary in 0:04:59.279 --> 0:05:02.520 the coal mine is in early July when we know 0:05:02.680 --> 0:05:04.880 that contractor sales for Country out And was down fifty 0:05:04.920 --> 0:05:08.279 four percent year over year in June. And I think 0:05:08.680 --> 0:05:12.080 some of the media has liken China developers to that 0:05:12.200 --> 0:05:16.000 business model to a Ponzi scheme, which is, you know, 0:05:16.040 --> 0:05:19.320 because often developers need to bring in fresh new cells 0:05:19.360 --> 0:05:22.400 to generate cash in order to surface the construction cost 0:05:22.480 --> 0:05:24.719 of projects that were sold one to two years ago. 0:05:24.760 --> 0:05:26.680 And Country Oda had said before in need twenty eight 0:05:26.720 --> 0:05:29.480 to thirty billion yar a month to ensure it has 0:05:29.600 --> 0:05:32.440 enough cash to complete presole properties. Yet we keep on 0:05:32.520 --> 0:05:37.120 seeing cells falling, you know, sixteen billion, twelve billion, and 0:05:37.200 --> 0:05:39.359 that's when we started making calls on you know, we 0:05:39.400 --> 0:05:42.839 need to worry about its liquidity. But I think everything 0:05:42.880 --> 0:05:46.279 is unfolding so quickly and suddenly. Timing wise, our best 0:05:46.279 --> 0:05:48.920 guests was something that might happen late this year or 0:05:48.960 --> 0:05:51.440 early next year when it's convertible born or dollar born 0:05:51.520 --> 0:05:52.200 come due. 0:05:52.279 --> 0:05:55.600 So Christy, you med an interesting observation. Are you suggesting 0:05:55.640 --> 0:05:59.800 that they need new sales to fund existing projects? 0:06:00.040 --> 0:06:03.240 Yeah, because I think it's the business model of Chinese developers. 0:06:03.279 --> 0:06:06.960 You know, they are looking at high turnover of their assets, 0:06:07.480 --> 0:06:10.520 so they will try to make money from contract to sales, 0:06:10.600 --> 0:06:13.000 and with that money they would invest in new land 0:06:13.040 --> 0:06:16.719 puzzles to just keep on boosting their land bank and 0:06:16.800 --> 0:06:20.920 their top line growth. But suddenly, when sell slum, which 0:06:20.960 --> 0:06:23.240 is the case when everywhere went bus and the whole 0:06:23.279 --> 0:06:26.760 industry we had saw thirty percent slum in sALS in 0:06:26.800 --> 0:06:30.520 twenty twenty two, the problem starts unfolding and we can 0:06:30.560 --> 0:06:33.000 see that, you know, they're running out of liquidity. A 0:06:33.040 --> 0:06:35.760 lot of their money is locked on a project level. 0:06:36.360 --> 0:06:40.520 And then we see, you know, developers failing to repay debt, 0:06:40.680 --> 0:06:44.120 and it's just keep on spreading to more and more developers. 0:06:44.320 --> 0:06:46.840 And that wasn't just for Country Garden, was it. Christie 0:06:46.880 --> 0:06:50.600 Hung that's true for most China property developers. This idea 0:06:50.720 --> 0:06:53.560 that as long as they have access to financing, whether 0:06:53.560 --> 0:06:56.559 it's debt or equity or for sales, they can keep 0:06:56.680 --> 0:06:59.520 kicking the ball down. They can keep perpetuating their business 0:06:59.600 --> 0:07:01.279 model once something goes wrong. 0:07:01.920 --> 0:07:05.320 Yes, that's very true. And I think, just to be clear, 0:07:05.360 --> 0:07:08.599 you know, since Everygrand's debacle, there are over sixty other 0:07:08.640 --> 0:07:12.760 developers that have extended or defaulted on their debts. So 0:07:12.960 --> 0:07:16.080 there are many privately owned developers that is still soften, 0:07:16.440 --> 0:07:19.520 and Country Garden is one of the biggest survivor until 0:07:19.720 --> 0:07:22.800 it's failing to repay is coupon payments. 0:07:23.560 --> 0:07:26.600 So back during the global financial crisis, the US and 0:07:26.720 --> 0:07:30.320 European government saved a lot of banks and companies dean 0:07:30.440 --> 0:07:33.400 too big to fail? Do you think Country Garden is 0:07:33.440 --> 0:07:36.160 too big to fail? And will the Chinese authorities come 0:07:36.200 --> 0:07:37.600 to the rescue with a bailout plan? 0:07:38.760 --> 0:07:41.720 So to me, it's too big to fail, and because 0:07:41.800 --> 0:07:44.400 I've talked about how it's the largest developer by itself 0:07:44.440 --> 0:07:47.640 in the past six years and a dead crisis is 0:07:47.640 --> 0:07:50.840 going to put completions of its three thousand projects at risk. 0:07:51.360 --> 0:07:53.520 But that being said, we don't think Country Garden can 0:07:53.560 --> 0:07:56.320 count on about by the government because since mid twenty 0:07:56.360 --> 0:08:00.280 twenty one, since Everygrand's debarcle, the government has stopped sort 0:08:00.320 --> 0:08:04.360 of rescuing the liquidity of individual developers, and Country Garden 0:08:04.440 --> 0:08:07.600 could be no exception. You know, the government's priority is 0:08:07.640 --> 0:08:12.360 to complete the priestole homes to ensure the livelihood of people, 0:08:12.440 --> 0:08:14.480 but not to prevent corporate effaults. 0:08:14.720 --> 0:08:17.120 And is there an underlying raison for that. Is the 0:08:17.160 --> 0:08:19.600 government just running out of finances or is it more 0:08:19.600 --> 0:08:21.680 that the worried about moral hazard risk. 0:08:22.320 --> 0:08:25.880 I think both of your reasoning makes sense, and at 0:08:25.880 --> 0:08:27.880 the end, I think it does make sense if the 0:08:27.880 --> 0:08:29.880 government doesn't offer a bet or because if you look 0:08:29.920 --> 0:08:32.560 at the land bank of Country Garden, eighty percent of 0:08:32.600 --> 0:08:36.679 it is focused on China smaller low tier cities where 0:08:36.760 --> 0:08:39.200 you know, housing is now very hard to sell and 0:08:39.240 --> 0:08:42.560 that's very weak demand in those markets. So even if 0:08:42.600 --> 0:08:45.280 there is hand out from the government, it is going 0:08:45.360 --> 0:08:49.360 to only offer temporary liquidity reprieve, but it's not going 0:08:49.400 --> 0:08:52.920 to change the longer term fate that you know, Country 0:08:52.960 --> 0:08:56.440 Garden's business model isn't working, and it's due to aufflaor 0:08:56.520 --> 0:08:59.439 strategic focus on log cities, and I think to the 0:08:59.480 --> 0:09:02.800 government's point, it might not make sense to throw good 0:09:02.840 --> 0:09:04.120 money off to pat. 0:09:04.600 --> 0:09:08.400 You're listening to Asia Centric from Bloomberg Intelligence. By the way, 0:09:08.480 --> 0:09:11.240 if you like what you hear, and we hope you do, 0:09:11.720 --> 0:09:16.600 please rate us on Apple Podcasts, Spotify, Google Podcasts, or 0:09:16.640 --> 0:09:19.360 wherever you may be listening to us. Of course, more 0:09:19.400 --> 0:09:23.160 stars are better. Your feedback matters, and we love hearing 0:09:23.160 --> 0:09:26.920 from our listeners. You know, a lot of the damage 0:09:27.240 --> 0:09:30.800 may not come from the crisis itself at Country Garden, 0:09:30.840 --> 0:09:34.120 but in Chinese consumer's reaction to it, because it may 0:09:34.160 --> 0:09:37.400 fan the flames of doubt among home buyers. Many you're 0:09:37.440 --> 0:09:40.239 going to be reluctant to purchase because they lack confidence 0:09:40.280 --> 0:09:43.720 that Country Garden can deliver. Are we at risk of 0:09:43.760 --> 0:09:46.280 a feedback loop here? Now that this has happened to 0:09:46.320 --> 0:09:49.720 a second major developer, Daniel Fan any take on that? 0:09:50.600 --> 0:09:53.880 Yeah, I think it's just Tom Westpinal just add to 0:09:54.080 --> 0:09:57.680 what Christy mentioned. I think we financing is one thing 0:09:57.880 --> 0:10:01.800 causing the trouble. It's a double mmy weaker sales plus 0:10:01.800 --> 0:10:05.800 a let lot with financing market. If you're homeowner, first 0:10:05.800 --> 0:10:08.520 of all, you worry about delivery, and then second of all, 0:10:08.559 --> 0:10:13.000 you worry about mortgage, so definitely it will burn into consumption. 0:10:13.720 --> 0:10:17.359 I think an other impact would be like engineering companies. 0:10:18.040 --> 0:10:22.319 Construction companies that deal directly with developers may also take. 0:10:22.160 --> 0:10:24.680 The heat, right and I think that's you know, with 0:10:24.760 --> 0:10:27.840 the stumming home selves. Adding to what Dan just mentioned, 0:10:27.840 --> 0:10:30.880 there's also downstream industries that is going to be impacted. 0:10:30.920 --> 0:10:34.920 You know, look at renovation companies, white goods, furniture, and 0:10:34.960 --> 0:10:38.040 if there's falling home prices, you can expect there would 0:10:38.040 --> 0:10:41.880 be wealth effect on consumption. Consumers are now feeling poorer 0:10:41.920 --> 0:10:45.280 because home prices are declining and they are less likely 0:10:45.360 --> 0:10:49.680 to spend, especially on say discretionary items, and that in 0:10:49.760 --> 0:10:54.320 turns squeeze retail sales, herd corporate earnings, and corporates might consider, 0:10:54.360 --> 0:10:57.680 you know, it has to cut headcounts, and then that's 0:10:57.760 --> 0:11:00.000 built over into you know, there's a weaker and player, 0:11:00.000 --> 0:11:02.600 I'm an outlook in the market, and people are not 0:11:02.679 --> 0:11:05.839 feeling safe about the income and about their job, so 0:11:05.880 --> 0:11:08.280 then they might not be able to commit to buying 0:11:08.280 --> 0:11:11.520 a property right now. So it's a negative loop, as Tom. 0:11:11.320 --> 0:11:14.960 You mentioned, and Chinese consumers are already feeling strapped, and 0:11:15.000 --> 0:11:18.559 this is coming against a backdrop of almost a cascade 0:11:18.640 --> 0:11:22.920 of problems. You've got inflation, you've got youth unemployment. So 0:11:23.160 --> 0:11:25.600 talk a little bit about how the impact and the 0:11:25.640 --> 0:11:29.600 housing market is dovetailing into all those other factors. 0:11:30.240 --> 0:11:33.800 China property is say twenty twenty five percent of China's GDP. 0:11:34.120 --> 0:11:34.800 That's a lot. 0:11:35.040 --> 0:11:38.920 It's a pillar industry. So if it has a big 0:11:38.960 --> 0:11:41.839 problem like country guidence event that we're looking at right now, 0:11:41.840 --> 0:11:45.000 it's going to weigh on sentiment on the Ovoy economy. 0:11:45.440 --> 0:11:47.960 So what can the authorities do? The Chinese government has 0:11:48.000 --> 0:11:51.800 always been able to pull some leavers to restart the economy, 0:11:51.880 --> 0:11:54.960 to fan the animal spirits. What can they do to 0:11:55.040 --> 0:11:56.480 save the housing industry? 0:11:57.360 --> 0:11:59.760 I think for now we are seeing the government is 0:11:59.800 --> 0:12:04.040 focused on demand syde policies like easing home purchase restrictions 0:12:04.080 --> 0:12:08.480 in larger cities, lowering down payment ratios, and cutting mortgage rays. 0:12:08.679 --> 0:12:10.680 But I think the reality is, you know, people are 0:12:10.720 --> 0:12:14.480 not buying property because mortgage rate is cheap. They were 0:12:14.559 --> 0:12:18.480 buying property because they expect home price to appreciate. That's 0:12:18.559 --> 0:12:20.680 until the party is over in twenty twenty one. You know, 0:12:20.720 --> 0:12:24.200 the household mindset about investing in property has changed already, 0:12:24.800 --> 0:12:27.719 and the government's mentor of housing is for living in, 0:12:27.800 --> 0:12:31.400 not for expectation, is becoming more and more ingrained in 0:12:31.520 --> 0:12:34.920 people's mindset, and I think what policy didn't do this 0:12:35.120 --> 0:12:38.679 round is to address the liquidity problem of any developer. 0:12:39.240 --> 0:12:42.160 So when buyers continue to see more developers are defaulting, 0:12:42.640 --> 0:12:46.080 that's a big damage to confidence. I think it's just 0:12:46.200 --> 0:12:49.080 very hard to just go with demand side policies to 0:12:49.360 --> 0:12:52.480 just revive demand and not fix the corporate debt problems 0:12:52.480 --> 0:12:56.040 that's facing Chinese developers, because the two go hand in 0:12:56.080 --> 0:12:59.559 hand together to bring up the health of the China's 0:12:59.559 --> 0:13:00.000 housing mine. 0:13:01.000 --> 0:13:03.720 Trying to just lower it's interest rate by fifteen basis 0:13:03.760 --> 0:13:05.920 points to two point five percent. Look, I think this 0:13:06.040 --> 0:13:08.280 was the steepest cutting three years. Do you think this 0:13:08.400 --> 0:13:10.000 is going to have any impact at all? 0:13:11.360 --> 0:13:13.480 I think, as I said, I don't think it's going 0:13:13.559 --> 0:13:16.680 to move the needle in terms of housing market sentiment 0:13:16.840 --> 0:13:20.559 because people are not buying because mortgage rate is cheap. 0:13:21.160 --> 0:13:24.960 They are buying property because they expected home price to appreciate, 0:13:25.000 --> 0:13:27.640 and that was the case in twenty sixteen to twenty twenty, 0:13:27.840 --> 0:13:30.640 when prices were up for to eleven percent per year, 0:13:31.080 --> 0:13:34.080 and you know, home price appreciation is just almost like 0:13:34.120 --> 0:13:36.959 a certainty to people. That's why there's so much investment 0:13:37.200 --> 0:13:42.080 going into property. And there's obviously overbuilding of housing in China, 0:13:42.640 --> 0:13:45.880 and when we see that they're downside to home prices 0:13:46.000 --> 0:13:50.680 since twenty twenty one, people stop investing those overbuilding of 0:13:50.960 --> 0:13:53.840 you know, infantry. There's no its demand coming in to 0:13:53.880 --> 0:13:56.080 absorb them, and that becomes a big problem. 0:13:56.720 --> 0:14:01.120 Christy Hang, Daniel Fan. We've seen Chinese regulators step in. 0:14:01.280 --> 0:14:04.640 There was somewhat of a rescue package in November, and 0:14:04.760 --> 0:14:08.440 yet still you have a second major developer that's fallen 0:14:08.480 --> 0:14:10.959 into the stress. How did we get here? 0:14:11.800 --> 0:14:15.959 I think on the financing side, the government tried to help, 0:14:16.200 --> 0:14:19.760 but the structure itself has some issue. I think they 0:14:19.800 --> 0:14:23.200 did some like three arrows program. The second one is 0:14:23.240 --> 0:14:28.120 to guarantee onso borns issue by developers. But the problem 0:14:28.240 --> 0:14:31.840 is developers need to pull up collaterals. As you know, 0:14:31.920 --> 0:14:34.520 a lot of these developers they are over leveraged already. 0:14:34.880 --> 0:14:38.240 They don't have a lot of unpledged asset to post 0:14:38.240 --> 0:14:43.160 a collateral purpose. So that's the reason why the supportive 0:14:43.200 --> 0:14:45.320 program did not work out that well. 0:14:46.240 --> 0:14:49.400 Yeah, to back up dance point, say, for example, a 0:14:49.400 --> 0:14:53.000 Country Garden, it was able to issue state guarantee bond 0:14:53.280 --> 0:14:57.120 for about three point five billion in twenty twenty two, 0:14:57.200 --> 0:15:00.760 and that compared to itself, Slum is down two hundred 0:15:00.800 --> 0:15:04.880 billion on. So you see the extreme comparison of how 0:15:04.960 --> 0:15:09.160 littwo bond is able to raise and how sales has 0:15:09.320 --> 0:15:12.960 been in a steep decline. That just shows you even 0:15:13.120 --> 0:15:17.000 though the government filed to support high quality developers like 0:15:17.040 --> 0:15:20.680 Country Garden back in November during the Rescue Plan, policy 0:15:20.760 --> 0:15:24.000 support up to this point seems still far from sufficient. 0:15:24.720 --> 0:15:25.040 Daniel. 0:15:25.040 --> 0:15:27.320 If we can take a step back, country Gardens is 0:15:27.360 --> 0:15:31.520 still not in technical default. What are the next steps? 0:15:31.720 --> 0:15:33.800 Can they pull a rabbit out of the hat? 0:15:34.600 --> 0:15:37.600 I think yeah, they still have like thirty day great spirit. 0:15:37.640 --> 0:15:41.160 They're supposed to pay the cubebone on August six, so 0:15:41.360 --> 0:15:44.880 meaning that like around September six, if they are able 0:15:44.880 --> 0:15:46.760 to come up with their money, then they are able 0:15:46.800 --> 0:15:51.120 to resolve this technical default. I'm still a little bit 0:15:51.200 --> 0:15:53.880 hopeful that they are able to come up with money, 0:15:54.040 --> 0:15:57.840 or at least come up with some swittener like to 0:15:57.920 --> 0:16:01.920 ask one extension of the cube on payment, So I 0:16:01.960 --> 0:16:04.600 think that we will buy them some time to deal 0:16:04.640 --> 0:16:08.240 with a bigger problem. And Country gardens demise has had 0:16:08.240 --> 0:16:11.680 a big impact on equity markets, but arguably it's had 0:16:11.720 --> 0:16:15.520 an even bigger impact on credit markets. How important is 0:16:15.600 --> 0:16:19.440 Country Garden to China's credit markets and what's the lasting 0:16:19.480 --> 0:16:23.160 impact if it were to devote? I think the impact 0:16:23.360 --> 0:16:26.000 is in that addition to the fact that it's a 0:16:26.040 --> 0:16:31.400 core holding for many fire managers. Is market share in 0:16:31.440 --> 0:16:34.680 the ind that is still not small if I remember correctly. 0:16:34.800 --> 0:16:38.560 It had a point eight billion of US dollars bond 0:16:39.160 --> 0:16:42.800 in the China Real Estate Index, which is around like 0:16:42.920 --> 0:16:47.080 thirty something billion if I remember correctly, So the proportion 0:16:47.360 --> 0:16:52.360 is not small. And I think more importantly is we 0:16:52.400 --> 0:16:56.600 don't have other big developers left after Country Garden. We 0:16:56.640 --> 0:16:59.880 have a bunch of like niche developers, and then we 0:17:00.120 --> 0:17:05.080 have some soees and a couple of investment grade developers. 0:17:05.480 --> 0:17:11.680 So if Country Garden defaults, it will be probably marked 0:17:11.920 --> 0:17:15.560 kind of the end of China property era since like 0:17:15.920 --> 0:17:17.800 two thousand and eight something like that. 0:17:17.920 --> 0:17:21.159 Well, that's a pretty stark or rather bold take, I 0:17:21.160 --> 0:17:21.760 would say. 0:17:22.040 --> 0:17:26.200 Yeah, So if you imagine, like if Country Garden defaults, 0:17:26.480 --> 0:17:31.040 we are going back to pre Country Garden era. Country 0:17:31.040 --> 0:17:35.360 Garden was listed in two thousand and seven, so then 0:17:35.440 --> 0:17:38.040 if they default, basically we are back to two thousand 0:17:38.080 --> 0:17:41.840 and six. At that time there were like a handful 0:17:41.880 --> 0:17:43.879 of developers in the board market. 0:17:44.280 --> 0:17:47.320 I think maybe I would like to ask then a 0:17:47.400 --> 0:17:51.520 question about the slow process of restructuring of bonds for 0:17:51.760 --> 0:17:54.920 the developers. I say, Everygren's debacle started in mid twenty 0:17:55.000 --> 0:17:58.280 twenty one, but now were still nowhere in the process 0:17:58.320 --> 0:18:01.360 of concluding our restructuring, and what is your take on that. 0:18:01.760 --> 0:18:03.760 I think there are a few reasons for that. One 0:18:03.880 --> 0:18:07.120 is to crystallize the total death. I think, for example, 0:18:07.119 --> 0:18:10.960 Evergrand they announced their twenty twenty two results not that 0:18:11.080 --> 0:18:14.760 long ago, so you need to have some kind of 0:18:15.200 --> 0:18:18.920 numbers to form at least the framework of the that 0:18:19.119 --> 0:18:22.439 restruction plan. I mean, ideally you're able to do some 0:18:22.520 --> 0:18:25.960 kind of careful projection to see how much sales you're 0:18:26.000 --> 0:18:29.560 able to generate, although that's a big academic If you 0:18:29.640 --> 0:18:34.080 talk about Evergrant's extension plan, the longest one is twelve years, 0:18:34.400 --> 0:18:37.040 So you're going to do a projection for twelve years, 0:18:37.080 --> 0:18:41.280 and I don't think it's practical at the current environment. 0:18:42.080 --> 0:18:45.200 And the other thing is, given what you have mentioned 0:18:45.240 --> 0:18:47.639 the outlook of the SETA and we are in a 0:18:47.800 --> 0:18:52.680 down cycle, some developer may just take the advantage of 0:18:53.000 --> 0:18:57.199 observing what's happening what others are going to do. At 0:18:57.240 --> 0:19:00.359 the same time, they are kind of in the place 0:19:00.440 --> 0:19:04.000 it standstill or some kind of like foremost stand still, 0:19:04.840 --> 0:19:07.639 meaning that they don't need to pay coupon and the 0:19:07.720 --> 0:19:10.240 one is going to sue them. There's some cases that 0:19:10.800 --> 0:19:13.720 develop us are being sue, but in most cases they 0:19:13.720 --> 0:19:16.680 are able to get away. So that's another reason for 0:19:16.840 --> 0:19:20.879 a practical purpose. So all added together, we sees no 0:19:21.320 --> 0:19:22.720 move in that restructuring. 0:19:23.920 --> 0:19:26.560 Christy Dan, what do you both see as far as 0:19:26.680 --> 0:19:30.480 contagion risk? It could ripple in any number of directions. 0:19:30.480 --> 0:19:34.480 You've got to exposed bondholders. HSBC and Blackrock are both 0:19:34.520 --> 0:19:39.480 major bondholders. There's of course other developers, banks, other lenders, creditors, 0:19:39.520 --> 0:19:43.560 asset managers, property buyers and owners. What do we know 0:19:43.640 --> 0:19:47.680 about contagion risk? How bad could it be? Who's most 0:19:47.720 --> 0:19:49.280 at risk? Tell us what you're thinking. 0:19:50.000 --> 0:19:54.160 I think within the developers space after country garden biers 0:19:54.200 --> 0:19:56.439 are going to question you know, can I trust in 0:19:56.560 --> 0:20:01.760 any private developers in China and the pres projects And therefore, 0:20:01.800 --> 0:20:04.960 you know, for the small amount of developers that are 0:20:04.960 --> 0:20:08.120 still left standing, the cells are going to suffer and 0:20:08.680 --> 0:20:10.920 so as the liquidity and we do expect a second 0:20:10.920 --> 0:20:14.399 wave of liquidity crisis, and that could wipe out most 0:20:14.480 --> 0:20:18.080 major players in the private sector in a China property space. 0:20:18.240 --> 0:20:20.960 It becomes a toxic feedback loop, doesn't it. 0:20:21.200 --> 0:20:24.440 Yes, And if you look at developers like Agile Season, 0:20:24.680 --> 0:20:27.760 they have even weaker cash coverage of short term debt 0:20:28.080 --> 0:20:31.280 than Country Garden as of end twenty twenty two, and 0:20:31.320 --> 0:20:34.800 they're similarly focused on China's low tier city so their 0:20:34.840 --> 0:20:37.080 liquidity would be something that we'll be watching in the 0:20:37.119 --> 0:20:37.960 next six months. 0:20:38.000 --> 0:20:40.560 I was going to mention Warren Buffett is famous for 0:20:40.640 --> 0:20:44.440 saying there's never just one cockroach in the kitchen. We've 0:20:44.480 --> 0:20:48.440 already seen many developers, not just Country Gardener ever Grant 0:20:48.680 --> 0:20:51.640 tumble into distress. But it's not a stretch. I think 0:20:51.760 --> 0:20:53.840 others are at risk, as you just mentioned. 0:20:54.160 --> 0:20:56.800 I think, yeah, being this way for a second or 0:20:56.880 --> 0:21:01.080 the impact depends on the situation to the banking sector 0:21:01.240 --> 0:21:05.320 in an other ways, given the bank's exposure to developers 0:21:05.640 --> 0:21:09.800 and also like potential delay in mortgage installments on. 0:21:09.920 --> 0:21:13.200 So, yeah, Daniel, that's an interesting point. Over the weekend 0:21:13.320 --> 0:21:17.080 there was news that a major Chinese trust company missed 0:21:17.119 --> 0:21:21.840 a payment, sparking concerns posed by wealth products issued by 0:21:22.400 --> 0:21:24.199 I guess the shadow banking sector if you'd like to 0:21:24.240 --> 0:21:28.520 call it. Is there any relationship between these wealth products 0:21:28.560 --> 0:21:29.919 and developers. 0:21:30.760 --> 0:21:35.880 So, property developers have been big issuers of truts loans 0:21:35.920 --> 0:21:38.920 and that is one of the major funding channels too, 0:21:39.040 --> 0:21:41.600 in addition to on shore offshop bonds as well as 0:21:41.600 --> 0:21:45.240 bank lending. So, as Dan mentioned, you know a big 0:21:45.359 --> 0:21:49.720 chunk of private developer issuers. They have either extended or 0:21:49.760 --> 0:21:54.760 defaulted on the debts. The issues with the delinquency of 0:21:54.800 --> 0:21:58.280 these truts products are going to continue to emerge, and 0:21:59.119 --> 0:22:01.600 my continuity to see more headlines hitting the market. 0:22:02.240 --> 0:22:04.639 Christy, Dan paint the picture for us. How do you 0:22:04.720 --> 0:22:08.560 both see this drama unraveling? It's not going to stop 0:22:08.560 --> 0:22:12.720 with Country Garden. Christy, you just suggested, do regulators intervene? 0:22:13.000 --> 0:22:15.760 Do bankers intervene? What's the endgame? What do you see 0:22:15.760 --> 0:22:18.239 three six months down the road? Right? 0:22:18.240 --> 0:22:21.520 I think country Guidance event tells us that most of 0:22:21.680 --> 0:22:25.040 China's private developers could be wiped out from the market. 0:22:25.680 --> 0:22:29.480 And the scary thing is private developers in China account 0:22:29.600 --> 0:22:33.280