Real estate giant’s financial crisis threatens Chinese economy

China’s largest real estate company, ‘Country Garden’ has lost billions of dollars, accrued 200 billion USD in outstanding liabilities and is staring at default, posing yet another threat to the Chinese economy, New York Times reported.
Notably, Country Garden is responsible for delivering apartments to around one million people across hundreds of Chinese cities, as per an estimate. However, the privately owned developer is now inching closer to default.
Many developers in China’s housing business are defaulters who no longer pay their debts. According to the New York Times, it’s important to pay attention to the potential collapse of Country Garden.
The company has still tried to project confidence. “One shall pick himself up from where he has fallen,” Mo Bin, Country Garden’s president, said last week, pledging to “spare no effort”, NYT reported.
However, the issue is considerably more widespread than just one business, and the timing is quite poor. According to the New York Times, Country Garden’s default would be the most recent in a spate of failures in a housing market that has been struggling for years.
Now, experts worry that Country Garden’s problems will extend to other financial markets, impeding any potential real estate market rebound and causing harm throughout the economy.
A year ago, Country Garden was a model corporate in an expanding universe of real estate companies that borrowed recklessly and then stopped paying their bills.
Founded by Yang Guoqiang in 1992, Country Garden was a beneficiary of the world’s biggest real estate boom. Its success turned Yang into a billionaire and became a testament to the country’s remarkable growth.
Chinese citizens invested their earnings and savings in real estate since they had few other trustworthy ways to amass money. According to the New York Times, Country Garden continued to borrow, and frequently took out new loans, to repay its debt because it believed that as long as it remained growing, it would be able to continue doing so.
But the bills grew so big that the authorities began to fear the debt would threaten the broader financial system. China’s top leader, Xi Jinping, ordered that homes should be for living, not for speculation.
In 2020, the government cracked down, limiting the ability of real estate companies to raise money and prompting a series of defaults.
Even as other developers stopped paying their bills, Country Garden continued to make good on its obligations. It began to rely more heavily on the revenue from selling apartments before they were finished and used that money to help finance its operations.
A slump in home buying this year has placed the company in a crisis, facing what it described as the “biggest difficulties since its establishment.”
In early August, Country Garden skipped two interest payments on loans. If it does not pay up by early September or get the creditors to give it more time after that 30-day grace period, it will default. Investors are not likely to lend it more money if that happens. The company’s share price has fallen below USD 1 in Hong Kong.
It has said it expects to report a loss of as much as USD 7.6 billion in the first six months of the year.
Even if people were still buying Country Garden’s apartments, they would not be able to buy enough of them to make up the financial shortfall, experts said.
All of this has led to worries that Country Garden will end up like China Evergrande, a real estate behemoth that collapsed in 2021 and set off panic in global markets.
“The Country Garden default could be as influential as Evergrande simply because it is so huge,” said Rosealea Yao, a real estate analyst at Gavekal, a China-focused research firm.
And it could be even worse. A handful of big developers have already defaulted. The market is more on edge than it was when Evergrande failed. Policymakers, while recently vowing to support the housing market, have not done enough to bolster confidence, New York Times reported.
“Things may get worse before the government reacts,” Yao said.
Policymakers are unlikely to go back to the days when companies could amass huge piles of debt for speculative projects. The housing market is also no longer growing like it did during the real estate boom that urbanized much of China in the 1990s and early 2000s.
China’s leaders have made it clear that the country cannot depend so heavily on real estate for economic growth. Gone are the days of real estate bubbles fueled by banks and investors throwing money at developers. More likely, some experts said, is that policymakers will do their best to make sure buyers get the apartments they paid for, according to NYT.
By one estimate from Gavekal Research, unpaid bills from private Chinese developers total USD 390 billion.