Shares of Country Garden Holdings are expected to drop 35 per cent as liquidity concerns surrounding China’s private builders are unlikely to ease anytime soon, according to JPMorgan Chase. 

The Wall Street bank downgraded China’s biggest property developer and its property management unit Country Garden Services Holdings to underweight, according to a note on Sunday (Jul 23). It warned that government measures would not stem the decline given the sector’s weakening sales, default risks and a slowdown in refinancing support from the authorities.

“Until confirmation of more government support, we believe liquidity concerns on privately-owned developers will linger,” analysts including Karl Chan wrote in the note. Shares of Country Garden and Country Garden Services slumped as much as 7 per cent and 17 per cent, respectively, on Monday alongside a drop in the broader real estate sector.

China’s ailing real estate sector is once again coming under pressure, as signs mount that some developers may struggle to repay their borrowings. An asset sale plan by Dalian Wanda Group has helped allay some concerns, although muted expectations for a big-bang stimulus continue to weigh on the outlook.

JPMorgan’s latest price target for Country Garden – HK$0.90 – is the most bearish on the street, according to data compiled by Bloomberg. Investors who followed its recommendation would have earned an 8.6 per cent return over the past year. Country Garden’s shares have plunged over 50 per cent since end-December.

JPMorgan’s bearish call comes amid rising scrutiny over sell-side research in China, as Beijing attempts to counter negative sentiment in markets amid slowing growth. Goldman Sachs’ bearish report on Chinese banks drew a backlash from a major lender as well as state media earlier this month.

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Still, the JPMorgan analysts believe the builder is “working hard to avoid a public bond default”, and logically speaking, the government “should have the incentive to offer more refinancing support to Country Garden to prevent another high-profile default in the industry”.

“This is to avoid further confidence crisis on other privately-owned developers and lower the likelihood of even more unfinished buildings,” they wrote. Bloomberg