A potential default at developer giant Country Garden has led to greater scepticism of the efficacy of China’s property policy help.

A group of builders that have received assistance in the form of state guarantees on yuan note sales have suffered the most in recent days, after Country Garden’s stumble showed that such aid has not been sufficient to help avoid repayment risks.

Chinese authorities unveiled the bond plan a year ago to help select developers raise funds as offshore borrowing costs surged and new-home sales – a key source of cash – slumped. Country Garden was one of the initial participating builders.

So was CIFI Holdings Group, which defaulted on offshore debt not long after selling a state-backed yuan note. 

Dollar bonds from units of Gemdale and Seazen Group – developers that were also among those first chosen to sell state-guaranteed local notes – extended recent declines on Tuesday (Aug 15). The companies were Monday’s worst performers in a Bloomberg index of Chinese high-yield dollar notes, posting losses of at least 16 per cent.

The property fallout and recent new-home sales declines add to China’s increasing economic strains, leaving anxious investors looking for stronger steps to turn the tide as missed payments have broadened to investment products at a financial conglomerate. The country’s central bank did unexpectedly reduce a key interest rate by the most since 2020 on Tuesday, just before another round of disappointing economic data were released. 

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Country Garden entering 30-day grace periods for two missed dollar-bond coupons that were effectively due on Aug 7 has sent China’s high-yield market to 2023 lows. 

But the selloff is widening.

Dollar notes from Longfor Group and China Vanke, two of the country’s few private-sector investment grade developers, lost at least 5 per cent on Monday to be the worst performers in a Bloomberg high-grade index. They, too, saw further declines on Tuesday.

Longfor’s notes plunged 24 per cent in August, easily the biggest decliner in the investment-grade gauge, even as a unit reportedly paid a 1.72 billion yuan (S$321.1 million) bond that matures this week. The company was the first developer last year to sell a state-guaranteed yuan notes.

“For companies like Longfor and Seazen, if they have enough cash flow to cover their operations they may survive this year,” said Amy Kam, a senior portfolio manager at Aviva Investors Global Services.

“But if the market doesn’t take a turn for better by then, how long can they last?” BLOOMBERG