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China Real Estate Giant Country Garden Could Be Next To Go Bust

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Evergrande, you have company.

Less than two weeks after China real estate conglomerate Evergrande Group filed for Chapter 15 bankruptcy protection in New York City, its competition, Country Garden, may be about to do the same.

Like Evergrande, Country Garden is about to become a household name for those working in the markets. It is China’s top real estate developer in terms of sales and is now poised to become the next casualty in China’s debt crisis. One of China’s best business news agencies, Caixin Global, said Country Garden was poised to default on its bond payments next month, barring a white knight or grace period extension.

Country Garden has three bonds set to mature or with a put option (the right to sell at a certain price booked by the option holder) beginning in September. They have a combined principal balance of 7.3 billion renminbi (or around $1 billion). Caixin said the company is looking to secure funds to pay bondholders.

One bond payment is due on Monday, which is right around the time its grace period ends on a missed August 7 payment. They are asking for more time. If they get an extension of the usual 30-day grace period they started in the first week of August, they either find the money to pay those lenders in that period, or the grace period ends again, and they go bust.

According to Bloomberg, BlackRock
BLK
has $358.5 million of Country Garden bonds as of Aug. 14. Allianz owned $301 million in Country Garden debt as recently as June. Fidelity, one of the biggest mutual fund companies targeting retirees and pension plans, is also an owner. As was emerging market asset manager Ashmore Group of London. They, too, have funds on offer for American investors, including retail investors. Ashmore said they had no comment when asked about their positions.

It is unclear if these asset managers still own Evergrande and Country Garden bonds at this time.

Country Garden stocks are part of the iShares MSCI Core Emerging Markets exchange-traded fund (EMG), among many other funds.

Country Garden’s chairwoman Yang Huiyan was once known as China’s richest woman. Forbes lists her family’s net worth at around $4.4 billion.

The company first failed to make interest payments of $22.5 million on dollar-denominated bonds on August 7.

Beijing does not seem willing to bail these guys out, according to Reuters.

Though this is anybody’s guess. As more real estate companies tumble, China’s government will likely be forced to take action. Adding Country Garden to the mix turns up the heat on the Chinese Communist Party (CCP) to make investors whole, or to lower credit costs which are already much lower than they are here.

Following a year of public health policy crushing the Chinese economy and manufacturing moving off-shore to avoid tariffs imposed by Washington, the CCP cannot afford to lose its goodwill with the locals. They will take to the streets if forced to.

“When the China Evergrande crisis unfolded, people feared that others would follow, but certainly not Country Garden. It was much less leveraged than Evergrande,” Alicia Garcia-Herrero, chief economist for Natixis, told German news publisher DW.

“Without a continual increase in (housing) prices, the whole real estate model is unsustainable and even a company like Country Garden can’t make it,” she told DW.

China is “very likely” to bail out Country Garden, Pushan Dutt, an economics professor at INSEAD business school in Singapore, told DW.

China’s real estate sector accounts for about 30% of the country’s gross domestic product. A real estate bubble implosion would have knock-on effects on China, forcing the CCP to pump money into the economy, something Xi Jinping remains reluctant to do.

China spent years wooing Western bond funds into its market, and Western bond lords pushed China to open that market. Asset managers from the U.S. have been big buyers of Chinese government and private bonds, priced in renminbi or dollars, for about 10 years. They were seen as investment-grade alternatives to the low U.S. and European bond yield.

The risks were known. China hawks have been hemming and hawing about a “China hard landing” at least since 2012. It all centered on real estate and provincial debt.

In 2021, Goldman Sachs began warning that Evergrande was teetering.

Kenneth Ho of Goldman Sachs research warned of this again in March 2022.

“More defaults will come. And if (credit) easing comes at a slower pace, more companies will default and it will be closer to our 31.6% default estimation,” he said. “It all hinges on policy outlook.”

Who Gets the Bailout?

The market is always salivating for stimulus and rate cuts. They do the same with China, wishing for rate cuts from the Central Bank, and Western-style money printing.

But Beijing might sit this out depending on how much economic pain the Chinese can take. Provincial governments have a lot of sway within the CCP in Beijing, though, and if major economic engines of the country are mired in unpayable debt obligations, Beijing might have no choice but to bail them out. This could include taking over the company and restructuring its debt. If they bail out bondholders, would it include Western investors, too? To avoid that, the CCP might reject helping money managers.

As far as the U.S. investor goes, should things get really bad and all of these China-focused funds and overweight China emerging market products take losses, will the Treasury Department make the case to bail out “the retail investor” and “retirees” by handing checks to BlackRock and others?

“They won’t do it,” thinks Albert Marko, a partner at Florida-based hedge fund Mavarinas Management Group. It’s not because they can’t or wouldn’t want to. “It’s politics. In an election year, everything will be put under the microscope.”

Congress has spent much of the summer going after China investments. The House Committee on the CCP doesn’t miss a hearing without discussing ways to restrict capital to China.

Washington has consistently warned businesses and investors of the increasing risks of doing business with China. Bailing out Wall Street for taking on that risk would be a terrible look for Washington.

China is arguably the most significant foreign policy issue on Capitol Hill and one most Americans understand and support.

Evergrande shares fell to near $0 on Monday. They are down 14% as of this writing. Vanguard, BlackRock, Schwab and KraneShares ETFs and mutual funds all own this dud.

Country Garden shares are also trading under $1, but are up 12.4% today. DFA Emerging Markets owns it. BlackRock’s iShares own it. They’ll probably be down 12.4% tomorrow.

Still, true believers exist.

“China will recover,” Devan Kaloo, global head of equities and emerging markets for abrdn, the new company name for the Standard Life/Aberdeen merger, said in a note on Monday. “Consumer confidence will increase as debt issues are resolved.”

Abrdn did not respond in time regarding their China holdings.

 

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Here are some facts about British Columbia’s housing market

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Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.

Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.

Average residential home price in B.C.: $938,500

Average price in greater Vancouver (2024 year to date): $1,304,438

Average price in greater Victoria (2024 year to date): $979,103

Average price in the Okanagan (2024 year to date): $748,015

Average two-bedroom purpose-built rental in Vancouver: $2,181

Average two-bedroom purpose-built rental in Victoria: $1,839

Average two-bedroom purpose-built rental in Canada: $1,359

Rental vacancy rate in Vancouver: 0.9 per cent

How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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B.C. voters face atmospheric river with heavy rain, high winds on election day

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VANCOUVER – Voters along the south coast of British Columbia who have not cast their ballots yet will have to contend with heavy rain and high winds from an incoming atmospheric river weather system on election day.

Environment Canada says the weather system will bring prolonged heavy rain to Metro Vancouver, the Sunshine Coast, Fraser Valley, Howe Sound, Whistler and Vancouver Island starting Friday.

The agency says strong winds with gusts up to 80 kilometres an hour will also develop on Saturday — the day thousands are expected to go to the polls across B.C. — in parts of Vancouver Island and Metro Vancouver.

Wednesday was the last day for advance voting, which started on Oct. 10.

More than 180,000 voters cast their votes Wednesday — the most ever on an advance voting day in B.C., beating the record set just days earlier on Oct. 10 of more than 170,000 votes.

Environment Canada says voters in the area of the atmospheric river can expect around 70 millimetres of precipitation generally and up to 100 millimetres along the coastal mountains, while parts of Vancouver Island could see as much as 200 millimetres of rainfall for the weekend.

An atmospheric river system in November 2021 created severe flooding and landslides that at one point severed most rail links between Vancouver’s port and the rest of Canada while inundating communities in the Fraser Valley and B.C. Interior.

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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No shortage when it comes to B.C. housing policies, as Eby, Rustad offer clear choice

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British Columbia voters face no shortage of policies when it comes to tackling the province’s housing woes in the run-up to Saturday’s election, with a clear choice for the next government’s approach.

David Eby’s New Democrats say the housing market on its own will not deliver the homes people need, while B.C. Conservative Leader John Rustad saysgovernment is part of the problem and B.C. needs to “unleash” the potential of the private sector.

But Andy Yan, director of the City Program at Simon Fraser University, said the “punchline” was that neither would have a hand in regulating interest rates, the “giant X-factor” in housing affordability.

“The one policy that controls it all just happens to be a policy that the province, whoever wins, has absolutely no control over,” said Yan, who made a name for himself scrutinizing B.C.’s chronic affordability problems.

Some metrics have shown those problems easing, with Eby pointing to what he said was a seven per cent drop in rent prices in Vancouver.

But Statistics Canada says 2021 census data shows that 25.5 per cent of B.C. households were paying at least 30 per cent of their income on shelter costs, the worst for any province or territory.

Yan said government had “access to a few levers” aimed at boosting housing affordability, and Eby has been pulling several.

Yet a host of other factors are at play, rates in particular, Yan said.

“This is what makes housing so frustrating, right? It takes time. It takes decades through which solutions and policies play out,” Yan said.

Rustad, meanwhile, is running on a “deregulation” platform.

He has pledged to scrap key NDP housing initiatives, including the speculation and vacancy tax, restrictions on short-term rentals,and legislation aimed at boosting small-scale density in single-family neighbourhoods.

Green Leader Sonia Furstenau, meanwhile, says “commodification” of housing by large investors is a major factor driving up costs, and her party would prioritize people most vulnerable in the housing market.

Yan said it was too soon to fully assess the impact of the NDP government’s housing measures, but there was a risk housing challenges could get worse if certain safeguards were removed, such as policies that preserve existing rental homes.

If interest rates were to drop, spurring a surge of redevelopment, Yan said the new homes with higher rents could wipe the older, cheaper units off the map.

“There is this element of change and redevelopment that needs to occur as a city grows, yet the loss of that stock is part of really, the ongoing challenges,” Yan said.

Given the external forces buffeting the housing market, Yan said the question before voters this month was more about “narrative” than numbers.

“Who do you believe will deliver a better tomorrow?”

Yan said the market has limits, and governments play an important role in providing safeguards for those most vulnerable.

The market “won’t by itself deal with their housing needs,” Yan said, especially given what he described as B.C.’s “30-year deficit of non-market housing.”

IS HOUSING THE ‘GOVERNMENT’S JOB’?

Craig Jones, associate director of the Housing Research Collaborative at the University of British Columbia, echoed Yan, saying people are in “housing distress” and in urgent need of help in the form of social or non-market housing.

“The amount of housing that it’s going to take through straight-up supply to arrive at affordability, it’s more than the system can actually produce,” he said.

Among the three leaders, Yan said it was Furstenau who had focused on the role of the “financialization” of housing, or large investors using housing for profit.

“It really squeezes renters,” he said of the trend. “It captures those units that would ordinarily become affordable and moves (them) into an investment product.”

The Greens’ platform includes a pledge to advocate for federal legislation banning the sale of residential units toreal estate investment trusts, known as REITs.

The party has also proposed a two per cent tax on homes valued at $3 million or higher, while committing $1.5 billion to build 26,000 non-market units each year.

Eby’s NDP government has enacted a suite of policies aimed at speeding up the development and availability of middle-income housing and affordable rentals.

They include the Rental Protection Fund, which Jones described as a “cutting-edge” policy. The $500-million fund enables non-profit organizations to purchase and manage existing rental buildings with the goal of preserving their affordability.

Another flagship NDP housing initiative, dubbed BC Builds, uses $2 billion in government financingto offer low-interest loans for the development of rental buildings on low-cost, underutilized land. Under the program, operators must offer at least 20 per cent of their units at 20 per cent below the market value.

Ravi Kahlon, the NDP candidate for Delta North who serves as Eby’s housing minister,said BC Builds was designed to navigate “huge headwinds” in housing development, including high interest rates, global inflation and the cost of land.

Boosting supply is one piece of the larger housing puzzle, Kahlon said in an interview before the start of the election campaign.

“We also need governments to invest and … come up with innovative programs to be able to get more affordability than the market can deliver,” he said.

The NDP is also pledging to help more middle-class, first-time buyers into the housing market with a plan to finance 40 per cent of the price on certain projects, with the money repayable as a loan and carrying an interest rate of 1.5 per cent. The government’s contribution would have to be repaid upon resale, plus 40 per cent of any increase in value.

The Canadian Press reached out several times requesting a housing-focused interview with Rustad or another Conservative representative, but received no followup.

At a press conference officially launching the Conservatives’ campaign, Rustad said Eby “seems to think that (housing) is government’s job.”

A key element of the Conservatives’ housing plans is a provincial tax exemption dubbed the “Rustad Rebate.” It would start in 2026 with residents able to deduct up to $1,500 per month for rent and mortgage costs, increasing to $3,000 in 2029.

Rustad also wants Ottawa to reintroduce a 1970s federal program that offered tax incentives to spur multi-unit residential building construction.

“It’s critical to bring that back and get the rental stock that we need built,” Rustad said of the so-called MURB program during the recent televised leaders’ debate.

Rustad also wants to axe B.C.’s speculation and vacancy tax, which Eby says has added 20,000 units to the long-term rental market, and repeal rules restricting short-term rentals on platforms such as Airbnb and Vrbo to an operator’s principal residence or one secondary suite.

“(First) of all it was foreigners, and then it was speculators, and then it was vacant properties, and then it was Airbnbs, instead of pointing at the real problem, which is government, and government is getting in the way,” Rustad said during the televised leaders’ debate.

Rustad has also promised to speed up approvals for rezoning and development applications, and to step in if a city fails to meet the six-month target.

Eby’s approach to clearing zoning and regulatory hurdles includes legislation passed last fall that requires municipalities with more than 5,000 residents to allow small-scale, multi-unit housing on lots previously zoned for single family homes.

The New Democrats have also recently announced a series of free, standardized building designs and a plan to fast-track prefabricated homes in the province.

A statement from B.C.’s Housing Ministry said more than 90 per cent of 188 local governments had adopted the New Democrats’ small-scale, multi-unit housing legislation as of last month, while 21 had received extensions allowing more time.

Rustad has pledged to repeal that law too, describing Eby’s approach as “authoritarian.”

The Greens are meanwhile pledging to spend $650 million in annual infrastructure funding for communities, increase subsidies for elderly renters, and bring in vacancy control measures to prevent landlords from drastically raising rents for new tenants.

Yan likened the Oct. 19 election to a “referendum about the course that David Eby has set” for housing, with Rustad “offering a completely different direction.”

Regardless of which party and leader emerges victorious, Yan said B.C.’s next government will be working against the clock, as well as cost pressures.

Yan said failing to deliver affordable homes for everyone, particularly people living on B.C. streets and young, working families, came at a cost to the whole province.

“It diminishes us as a society, but then also as an economy.”

This report by The Canadian Press was first published Oct. 17, 2024.

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