China's premier real estate developer, Country Garden, has confirmed the inevitable and defaulted on its offshore debts.
“The company expects that it won’t be able to meet all of its offshore payment obligations on time, due to a deep correction in China’s home market and its subdued sales,” the developer said in a statement to Bloomberg News in response to questions about its plans for the $15.4 million of interest due. A holder of the note said they had yet to receive money.
As current subscribers already know, I have discussed China’s ongoing real estate collapse at some length, including the rampant speculation that Country Garden represents China's “Lehman Brothers moment.”
That moment has now arrived. The failure to make a $15 Million coupon interest payment will now trigger formal default on the developer's $11 Billion in offshore debt.
Now comes the fallout and whatever financial firestorm default will unleash.
One casualty of these events is already emerging: China's credibility on the world stage as an economic power.
For decades China has sought to evade the inevitable corrections of the “invisible hand.” Now we see yet again that government intrusion into private markets never ends well, and comes with a hefty price tag.
China does not yet know how high that price will be. China is about to learn how high the price—and so will we.
Actually this may just be a nothingburger. What likely happens is a restructure and foreigners have to write off some debt. But it is printed money anyway, as in leveraged. What the foreign lenders received back in interest so far and will get back in interest after the restructuring, is still more than their write-off so they ended up making money.
It is the same game, as why banks keep lending money to corrupt Latin American and African regimes after they went under. It is also why a company called GM still exists and can take out loans. We will keep lending these developers money as long as we expect to get more back than we give.
The far more interesting game is what to do with the domestic borrowers and the actual unfinished buildings. That is potentially far more damaging for China, than some reputational damage. They cannot just pull the rug under all those middle-class people who have unfinished and unlivable apartments in ghost towns, and who's pension depends on these being valued at high paper values. But at the same time, there seems to be no plan for finishing many of them. Time (as in inflation) can solve many debt issues, but at some point in time they got to deal with the physical reality as in physical buildings too.
Got gold?