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Country Garden Crisis Puts China ETFs in the Spotlight

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Once a crucial engine of economic growth for the world’s second-largest economy, China’s real estate sector currently finds itself grappling with a crisis. Investors view the sector’s revival as being important for the recovery of China’s economy.

Inside China’s Real Estate Slump

The vast real estate market in China, where most of the household wealth remains invested in, has reemerged as a potential threat to the health of the overall economy. Declining property values and increasing unemployment levels in the country have made consumers skeptical of purchasing new homes, displaying weak consumer sentiment.

According to CNN, the sale of new homes took a sharp dive, with data released on Jul 31 indicating that sales by the country's top 100 developers fell 33% in July compared to the prior-year comparable month, marking the largest monthly sales drop since then.

Ratings Downgrade

Problems still engulf the real estate sector as Country Garden, once a thriving property developer is facing economic distress. Moody’s downgraded the company’s corporate family rating to Caa1 from B1, highlighting liquidity and refinancing risk after the Chinese developer missed two dollar bond coupon payments totalling $22.5 million that were due on Aug 6.

According to Reuters, Moody's predicts a pessimistic rating’s outlook for Country Garden, expressing uncertainty about the ability of China's largest private developer to meet its debt obligations. The Caa1 rating indicates an elevated credit risk level, as per the ratings agency's official website, as quoted on the Reuters article.

Moody's Investors Service, as quoted on Reuters, on Aug 11, stated that the credit distress faced by Chinese private developer Country Garden is expected to have a ripple effect on both the country's property and financial markets. This could lead to a dampening of sentiment and a potential setback in the recovery of the property sector.

Country Garden’s Debt Woes Intensify

Debt issues escalated for Country Garden, China’s top property developer, after its onshore bonds were suspended, another setback for policymakers striving to bolster confidence in a faltering economy. The suspensions resulted in the shares of the company falling 16% on Monday, hitting record lows, per the Reuters article.

The Country Garden meltdown follows a recent string of disappointing data, adding to the mounting pressure on policymakers to rebuild economic confidence. The situation becomes more critical as additional private property firms teeter on the edge, underscoring the urgency for timely financial support.

The suspensions of its onshore bonds followed the reports that the property developer was preparing for a debt restructuring.

More Economic Stimulus Needed?

In July, The People's Bank of China had announced an extension of 12 months, to be repaid by the end of 2024, for developers to repay their outstanding loans scheduled for this year. Nonetheless, the necessity for further definitive and commanding monetary policy remains a crucial consideration.

According to Time, China’s government is additionally strategizing to enhance the revitalization of urban villages, aiming to attract increased private investment in these projects. This initiative aims to bolster domestic demand and advance urban development, as highlighted by the State Council's announcement on Jul 21.

ETFs in Focus

Should investors maintain a negative outlook on the sector, they may opt to steer clear of ETFs such as the Global X MSCI China Real Estate ETF , which follows companies within the Chinese real estate domain. This fund has experienced a fall of about 9.53% since the beginning of the month (as of Aug 15).

However, if long-term investors think the market's sell-off is overdone, they might take the following funds into consideration.

China healthcare ETFs like KraneShares MSCI All China Health Care Index ETF (KURE - Free Report) and Global X MSCI China Health Care ETF appear interesting bets. Both funds added 0.9% and 0.6% past week despite all the Chinese economic problems.

Other China ETF winners in the past week included Global X MSCI China Energy ETF (down only 0.9%), KraneShares China Internet and Covered Call Strategy ETF (KLIP - Free Report) (down 0.96%), Global X MSCI China Utilities ETF (down only 2.8%) and First Trust China AlphaDEX Fund (FCA - Free Report) (down only 3.7%). These performances compare with 0.7% one-week losses seen in the S&P 500 and 4.2% one -week losses seen in the largest broader China ETF iShares MSCI China ETF (MCHI - Free Report) (down 4.2% past week).

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