Malaysia's domestic banks have little exposure to financial risks from China's largest property developer Country Garden, the nation's central bank said on Monday. This finding comes as concerns mount over Country Garden's financial health and ability to service its massive debts.

In an email to Reuters, Bank Negara Malaysia stated that local banks' lending and bond exposure to Country Garden Real Estate Sdn Bhd (CGRE), the developer's wholly-owned subsidiary in Malaysia, totaled less than 0.1% of the overall banking system as of June 2023. The central bank said CGRE was promptly servicing its loans and had adequate capital to meet obligations.

Country Garden is developing Forest City, its largest overseas project, across four artificial islands in Johor state bordering Singapore. The $100 billion planned city is now home to around 9,000 residents after its 2016 launch. However, demand fell sharply following China's capital controls and the COVID-19 pandemic.

Last week, Malaysian Prime Minister Anwar Ibrahim announced Forest City would become a special financial zone to draw investment and support business. This came as Country Garden's finances came under scrutiny after it missed two bond payments this month totaling $22.5 million.

The missed payments raised fears that China's property debt crisis could hinder broader economic recovery and spread overseas. But Bank Negara Malaysia stated Country Garden's troubles in China were unlikely to substantially impact Malaysia's real estate market.

Minimal Impact Expected Locally From Country Garden's Debt Issues

The central bank explained that risks from unsold units across Country Garden's various Malaysian projects remained manageable. It added the current situation with Country Garden Holdings in China was not forecast to have any material effect on overall property market activity and pricing in Malaysia.

Local banks are required to carefully evaluate current and future real estate conditions when financing property construction and development projects. Bank Negara emphasized Malaysian financial institutions faced limited financial stability risks related to exposure to CGRE.

CGRE is meeting its loan obligations on time and retains adequate capital reserves, the central bank reiterated. Its parent company, Country Garden Holdings, is China's largest property developer by sales. But it holds over $88 billion in total debt after years of aggressive expansion.

Country Garden Faces Rising Liquidity Pressures in China As Market Cools

Country Garden's predicament highlights the growing liquidity strains on overleveraged Chinese developers as the property market cools. Home prices have dropped for 12 straight months, while unfinished housing projects pile up across the country. These mounting headwinds make it harder for stretched builders to refinance and service their debts.

Nonetheless, Country Garden stated its Malaysia project was continuing as planned and pointed to its substantial assets. The developer has massive land banks in China, though much is likely pledged as collateral. While Forest City will benefit from its special zone status, Country Garden must fix its balance sheet and slash debts to regain financial stability.

Its missed bond payments suggest liquidity is tightening faster than expected. The coming months will test whether the developer can bolster sales, collect receivables, and reduce leverage while global economic growth slows. If progress stalls, Country Garden may need to restructure debt or sell assets.

crypto">How Could Country Garden's Troubles Impact Bitcoin and Crypto?

Country Garden's financial woes highlight the downside risks for Bitcoin and cryptocurrencies if China's property crisis continues escalating. Though crypto does not rely directly on China's real estate market, fallout from developer failures could create contagion across the country's fragile financial system.

This would likely drive risk-off sentiment and flight to safety flows benefitting the U.S. dollar over Bitcoin and other digital assets. A Chinese banking crisis would also have global growth implications that may pressure crypto prices. However, some investors could rotate to decentralized digital currencies if concerns mount over centralized institutions.

What Support Does Country Garden Have To Weather Liquidity Strains?

Country Garden still has options to endure short-term liquidity strains, though its runway is decreasing. The developer can tap credit lines, sell assets, or get support from state-owned entities. However, government assistance is uncertain. Bailing out Country Garden would create moral hazard ahead of China's Communist Party Congress in October.

The developer also has sizable contract assets from pre-sales it can monetize. Country Garden may strategically default on some overseas debts if it faces a severe crunch. But the company will likely prioritize ensuring social stability by completing pre-sold housing projects. Though risks are rising, an imminent collapse remains unlikely barring a sharp economic downturn.

In summary, Malaysia's domestic banks have limited direct exposure to Country Garden's overseas entities. The developer's predicament poses minor risks to the nation's financial stability. However, contagion across China's fragile property sector could dampen global growth and risk appetite. Country Garden retains options to navigate short-term liquidity strains, but its outlook hinges on reviving home sales and reducing massive leverage. The company's situation will likely fuel volatility in Chinese and global markets, potentially spurring risk-off moves that pressure Bitcoin and cryptocurrency prices.