China New Real Estate Crisis: This once-mighty homebuilder, formerly China’s largest, has just defaulted on an international bond for the first time, as reported by analyst. The grace period for payment had expired, and the company missed the mark. Notably, Country Garden has remained mum on the matter, and Citigroup, reportedly the bond’s trustee, has declined to comment.
With a staggering $190 billion in liabilities, Country Garden had narrowly avoided default on multiple occasions over the past month. However, the persistent slump in China’s property market and challenging refinancing conditions ultimately undermined its ability to generate sufficient funds to service its $15 billion debt due by June 2024. Earlier this month, the company had even issued a warning to investors that a default was on the horizon.
As things stand, Country Garden appears to be heading toward a debt restructuring, and this could potentially lead to a turbulent financial collapse, sending fresh shockwaves through China’s already struggling economy.
Let’s dive into the rise and fall of Country Garden and explore what lies ahead for China’s once-thriving property sector. Until recently, Country Garden stood as China’s biggest real estate developer, specializing primarily in residential properties. This Hong Kong-listed company, headquartered in Foshan, Guangdong province, has been responsible for over 3,000 projects across China and the transformation of more than 1,400 rural towns into bustling cities.
Besides residential developments, Country Garden expanded its reach into commercial real estate, including hotels, parking lots, and retail stores. The company even ventured into other diverse fields, such as robotics and agricultural services.
Employing around 300,000 people, Country Garden plays a vital role in providing jobs in China. However, this seemingly invulnerable firm started grappling with a cash crunch in recent times. In September, apartment sales plummeted by a whopping 81% compared to the same month the previous year. The developer reported a staggering $7 billion loss for the first half of 2023.
Country Garden’s challenges bear an eerie resemblance to those of Evergrande, another prominent Chinese developer that faced a major default in 2021, ultimately filing for bankruptcy in the United States in August. Evergrande had incurred losses totaling $81 billion over the preceding two years. The concerns surrounding China’s real estate sector have been growing steadily since the collapse of Evergrande. Country Garden made headlines in August when its liquidity crisis became public knowledge.
Reports surfaced that the company had missed interest payments on two US dollar bonds, drawing attention to its overall debt issues. On October 10, Country Garden admitted to missing a payment of HKD 470 million (around $60 million) due on a maturing bond. The company emphasized that this non-payment could lead to creditors demanding accelerated payments or enforcement actions.
Investors have been bracing for a Country Garden default for months, which could potentially send shockwaves across the world’s second-largest economy, given that real estate accounts for approximately 25% to 30% of China’s GDP. This year, Country Garden shares in Hong Kong have plummeted to the level of penny stocks. In August, it was removed from the Hang Seng Index, Hong Kong’s flagship index.
The company is led by Yang Huiyan, one of China’s wealthiest women, who has recently injected more of her personal wealth into the ailing business. Her fortune has witnessed a significant decline alongside the company’s stock price. Recent estimates show that China’s property market has enough apartments to house 1.4 billion people. It appears the problem will continue.
Last week, the IMF noted that China’s real estate sector is dragging down global growth. Beijing’s support for the sector failed to lift new home prices for the third month in September. More than two years ago, China’s government tightened developer financing laws, causing real estate problems.
In response, Beijing introduced various stimulus measures to rekindle growth, including slashing mortgage rates and lifting home purchase restrictions in cities.
Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, emphasized the need for a comprehensive strategy to address the real estate issue in China, ensuring the construction of all pre-financed homes. Most new homes in China are sold before they are built.
“There’s a problem with the developers, which needs to be sorted out,” Srinivasan pointed out. “Until that’s done, it’s going to affect confidence.” The future of China’s property sector remains shrouded in uncertainty, with Country Garden’s default adding a new layer of complexity to an already challenging landscape.
Our Reader’s Queries
Is China’s property market in crisis?
Over the last two years, the market for Chinese developers’ dollar-denominated bonds has experienced a significant decline, losing a staggering 87% of its value. This has resulted in a loss of USD135.5 billion from the outstanding notes, which were originally valued at USD154.9 billion, according to Debtwire.
Is China in financial trouble?
For years, China’s mounting debt has been a major cause for concern. As the economy has grown, so too has the debt, although it’s worth noting that the overall debt levels are comparable to those of other major economies like the United States and Japan. Despite this, the issue remains a pressing one that requires careful attention and management.
Are real estate prices dropping in China?
China’s property market continues to struggle as new home prices have fallen for the sixth consecutive month. The secondary market has been hit the hardest, with values plummeting to their lowest point in nine years. This highlights the need for authorities to take action to address the ongoing property slump.
Will China’s economy be hobbled for years by the real estate crisis?
According to the International Monetary Fund (IMF), the Chinese economy is predicted to experience a growth of 5.4% this year, but it is expected to slow down to 4.6% in 2024. Experts have identified several issues that are hindering the economy’s progress, but the most frequently mentioned one is the extended slump in the real estate sector.