China’s Country Garden recently warned it could miss making debt payments. The company is a “canary in the coal mine” for the country, according to Meyer, Unkovic and Scott Partner Dennis Unkovic. Unkovic tells Yahoo Finance Live that the Chinese economy is “in probably the worst position that I have seen it in in memory,” The reason why Unkovic is so down on the Chinese economy is the woes plaguing the real estate sector, which is a big source of economic activity.
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Video Transcript
DANNIS UNKOVIC: I think that the Chinese economy is in probably the worst position that I’ve seen it in in memory. A third of the Chinese economy, as you know, is based upon real estate. The real estate is totally– I don’t even have a word for it, but it’s so depressed that a third of the Chinese economy is now based upon real estate that’s in freefall. I think there were some reports yesterday and today about Country Garden, which is one of the largest private real estate developers in China. They owe about $187 billion, and it’s come out in the last several days they’re not able to pay people.
What’s really important, I think, is in the real estate market, if you want to buy a house, you order it ahead of time and you put money down. Sales have dropped for Country Garden 80% year on year to today. So the fact that they owe $187 billion or $200 billion, if they can’t pay, I sort of see Country Garden as like the– I don’t know what the expression is. A canary in the coal mine about what’s happening in China, because if a third of your economy is really depressed and the Chinese people are not putting money into real estate, which they’re not, the fact that the Chinese government has said, we’re going to spend another $180 billion on infrastructure projects I think is really not going to have much of an impact.
AKIKO FUJITA: Dennis, let’s put that in context, though, because we’ve already seen Evergrande default on its debt. Sunac China, same thing. But Country Garden in some ways raising even more alarm bells, because this was supposed to be the good actor, right, in this space, where we have seen so many companies taking on debt. The fact that Country Garden now missed one of its debt payments and is now saying they are in a serious condition here, where they may not be able to repay, they may potentially default, what does that tell you about the severity of the real estate collapse that’s playing out?
DANNIS UNKOVIC: What really worries me, great question, is that Country Garden was building, apartments, houses everywhere in third and fourth tier cities in China, and that’s how it got all of its money over the last couple of years. It was really the one everybody said, well, Country Garden’s showing what to do.
When you look at China, when you see the problems with the economy, putting Shanghai and Beijing and Ningbo aside, those third and fourth tier cities are where a lot of these empty apartments are, and that’s where Country Garden’s been getting its money. So when you see their sales dropping 80% over a 12 month period, you know, year on year, that’s really shocking. I don’t think they will find enough money to deal with the situation.
And when you go to the equity markets– look, you mentioned Evergrande a minute ago. Evergrande at its height owed about $300 billion, but that stock has plummeted 99%. Well, what do you think’s going to happen with Country Garden when they replace Evergrande as the canary in the coal mine?
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