JPMorgan has increased its forecast for corporate high-yield defaults in emerging markets worldwide due to concerns about the potential impact of a default by Country Garden on China’s property sector.
In a note dated August 15th, the US-based investment bank raised its 2023 global forecast from 6% to 9.7%. It also increased its forecast for Asia’s high-yield default rate from 4.1% to 10%. However, if China’s property sector is excluded, that figure drops to just 1%.
JPMorgan predicts that China’s property sector will account for almost 40% of all default volumes in 2023.
These changes come amid fears of contagion in the Chinese economy, which could experience a collapse in the property sector following a request by Country Garden, China’s largest private real estate developer, to delay payment on the private bond.
The largest private real estate developer in China has decided to postpone the payment of the private bond. This move has raised concerns about the potential ripple effect of a default by Country Garden on the Chinese property sector and the wider economy. The fact that JPMorgan’s risk assessment has been significantly increased highlights these worries. Country Garden has a much larger and more diverse range of developments compared to the China Evergrande Group.
The Chinese property sector has been facing challenges since 2020 due to a crackdown by Beijing on the debt levels of mainland property developers. Country Garden, a major player in the industry, defaulted in 2021 and announced an offshore debt restructuring program in March.
The crackdown measures, known as China’s “three red lines” policy, require developers to meet specific balance sheet conditions to take on more debt. These rules are aimed at limiting debt to the company’s cash flow, assets, and capital levels, and have led to a slowdown in the industry’s growth.
According to official data released on Wednesday, China’s new home prices experienced a decline in July. This marks the first time this year that such a fall has occurred. Specifically, prices decreased by 0.2% every month and by 0.1% compared to the same period last year. These figures were calculated by Reuters based on data from the National Bureau of Statistics. This is part of a larger trend of lackluster economic data, prompting calls for policy support to spur growth.
Country Garden, a former major developer in China, has until early September to pay the coupon payments it missed on two dollar notes on August 7th. The company also halted trading on 11 domestic bonds and warned that it may report a half-year annualized loss of up to 55 billion yuan ($7.5 billion).
Furthermore, JPMorgan predicts that if Country Garden defaults, it could add $9.9 billion to the global emerging markets high-yield corporate default tally for the year, resulting in a total default volume of $17 billion for the Chinese property sector in 2023.
JPMorgan estimates that if a Country Garden default were to occur, it could result in losses of $8 billion, leading to $8 billion worth of defaults among smaller Chinese property developers and an additional $2 billion for liability management in other high-yield Chinese sectors.
Over the past two and a half years, over $100 billion of China property bonded debt has defaulted, with $109 billion in defaults already recorded in the Chinese property sector since the start of 2021. This accounts for 94% of all defaults in Asia during that time.
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