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BEIJING: Fitch has downgraded to junk the credit rating of a subsidiary of Chinese property giant Country Garden, citing “heightened liquidity pressure” at the troubled firm.

Country Garden, China’s largest private developer in terms of sales last year, has amassed more than $150 billion in debt and said this month it had failed to make two bond payments, meaning it now risks a default.

The firm’s cash flow woes have fuelled fears that the firm could collapse, which many warn could have catastrophic repercussions for the Chinese financial system and economy.

Ratings firm Fitch on Wednesday said it was downgrading subsidiary Country Garden Services, which is responsible for property management, to BB+ from BBB- and put it on a negative watch.

It said the company’s “growth, brand reputation, profitability and funding access may be negatively affected by the heightened liquidity pressure” faced by the developer.

Country Garden is expected to publish its results for the first half of the year in the coming days and has said it expects a net loss of as much as 55 billion yuan ($7.5 billion).

Adding to the pressure on the firm, 31 billion yuan in bonds will expire in 2024, according to rating agency Moody’s.

Housing reforms in China during the late 1990s unleashed a boom in the real estate sector, spurred by social norms that consider owning a property a prerequisite for marriage.

But the massive debt accrued by the industry’s biggest players has been perceived by Beijing in recent years as an unacceptable risk for China’s financial system and overall economic health.

To reduce the sector’s indebtedness, authorities have gradually tightened conditions for developers’ access to credit since 2020, drying up sources of financing for firms already in debt.

A wave of defaults followed – notably that of Country Garden rival Evergrande, which had nearly $340 billion in debt and $2 billion in cash at the end of 2022.

In the face of a broader economic slowdown, Beijing has recently sought to bolster the property sector by cutting mortgage rates, slashing red tape and offering more loans to developers.

However, observers warn those measures have had little impact and officials need to do more.

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