China’s Country Garden has struck a deal to restructure its debts with bank creditors, which includes $178 million in compensation related to seized assets. This agreement clears a significant obstacle in their debt talks and focuses attention on getting full bank approval before a winding-up hearing set for August 11. The company has not commented on this issue.

Country Garden’s Concession

Country Garden’s agreement eases fears of an immediate default. Bond spreads may tighten slightly, and Asian real estate stocks might see modest gains as confidence grows before the upcoming court date. We view the developer’s deal with creditors as a way to reduce the risk of a chaotic collapse before the court hearing. This progress should provide a fragile support for the sector’s stocks for now. Eyes will be on the winding-up hearing, now rescheduled for July 29, 2024. While this news may offer short-term relief, we remain cautious about the ongoing issues in the broader sector. Data from May shows that property investment in China dropped by 10.1% compared to last year, indicating that problems like weak demand and oversupply still exist. This suggests that any rise in stock prices due to one company’s restructuring might be limited.

Investment Strategy Response

In light of this, we think traders should consider selling near-term, out-of-the-money puts on ETFs that track Chinese property stocks, such as the Hang Seng Mainland Properties Index. This approach allows for earning premiums from higher volatility, betting that the company’s progress keeps the worst-case scenario at bay before the late July hearing. It’s a short-term strategy based on reduced fear, not a long-term bullish investment. Looking back, the Evergrande crisis showed us that initial restructuring agreements are often just the first step in a long and unpredictable journey. Therefore, we recommend using any resulting strength in the sector to buy longer-dated, cheaper puts. This offers protection against the ongoing economic struggles the market faces. This two-part options strategy aims to take advantage of a brief period of optimism while protecting against the structural decline in the sector. The Hang Seng property index is still down over 20% this year, reinforcing our belief that these are short-term opportunities within a larger downtrend. Create your live VT Markets account and start trading now.

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