How Country Garden became the new face of China’s spiraling property crisis

By Michelle Toh, Laura He and Diksha Madhok, CNN

Hong Kong (CNN) — Move over Evergrande. There is a new poster child of China’s protracted real estate crisis — Country Garden.

A financial industry group that makes determinations on credit events ruled Thursday that the property firm had suffered a “failure to pay” episode and that it happened on October 18, according to a notice on the website of the Credit Derivatives Determinations Committees.

The ruling follows separate reports from Bloomberg News and the Financial Times this week that the homebuilder, once the country’s largest, had defaulted on an international bond for the first time after failing to make payment within a grace period that expired last week.

Country Garden has not responded to requests for comment by phone or email. Citigroup, reportedly the bond’s trustee with authority to enforce its terms, declined comment.

The developer, which has $190 billion in liabilities, had dodged default on multiple occasions in the past month. But persistent weakness in China’s property market and a difficult refinancing environment had hobbled its ability to raise enough cash to service debt of $15 billion falling due by June 2024. Earlier this month, it warned investors that it could default.

The company is now heading towards a debt restructuring, and possibly a messy financial collapse that would send new shockwaves through China’s sputtering economy.

Here’s what to know about the rise and fall of Country Garden, and the future of China’s once red-hot property sector.

What is Country Garden?

Until last year, Country Garden was China’s biggest real estate developer, specializing in residential property.

Listed in Hong Kong and based in Foshan, Guangdong province, the company has developed 3,000 projects across the country, and converted more than 1,400 rural towns into cities.

The group also develops commercial real estate such as hotels, parking lots and retail stores, though it has branched out dramatically in other areas, such as robotics and agricultural services.

It is also responsible for masses of jobs in China, employing some 300,000 people, according to its recent annual report.

But the once seemingly bulletproof firm has been struggling with a cash crunch in recent times. Its sales of apartments fell by 81% in September, compared with the same month last year. The developer reported a record $7 billion loss for the first half of 2023.

Country Garden’s troubles are reminiscent of those of Evergrande, a once mighty Chinese developer that defaulted in 2021. Evergrande filed for bankruptcy in the United States in August, after posting losses of $81 billion in the last two years.

How did it get here?

While confidence in China’s real estate sector has been shaky since the collapse of Evergrande, Country Garden reignited fears in August when its liquidity crisis burst into public view.

That was when reports emerged that the company had missed interest payments on two US dollar bonds, casting attention on its overall debt problems.

On October 10, it said it had missed a payment of 470 million Hong Kong dollars ($60 million) due on a maturing bond, adding that “such non-payment may lead to relevant creditors of the group demanding acceleration of payment of relevant indebtedness owed to them or pursuing enforcement action.”

Investors have been bracing for months for a default by Country Garden, which could ricochet across the world’s second biggest economy, as real estate accounts for an estimated 25% to 30% of China’s GDP.

Country Garden shares in Hong Kong have become a penny stock this year. It was removed as a constituent of the city’s flagship Hang Seng Index in August.

The company is helmed by Yang Huiyan, one of China’s richest women. She has pumped more of her own wealth into the ailing business recently, and her fortune has plummeted along with the stock price.

What next for China’s property sector?

China has a huge glut of apartments, enough to provide homes for the entire population of 1.4 billion, according to a recent estimate, and there’s no end in sight to the crisis.

The real estate market remains a major drag on China’s economy and will have an impact on global growth, the International Monetary Fund (IMF) said last week.

New home prices fell in September, a third straight month of decline, according to data released last Thursday by the National Bureau of Statistics (NBS), despite Beijing’s efforts to shore up the sector.

The sector fell into crisis more than two years ago after a government-led clampdown on developers’ borrowing. Beijing has rolled out a slew of stimulus measures to revive growth, including cutting mortgage rates and scrapping restrictions on home purchases in cities.

At a press briefing last week, Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, said China needs to have a “comprehensive strategy” for real estate, which involves making sure all pre-financed houses are built. In China, most new homes are sold before they are constructed.

“There’s a problem with the developers, which needs to be sorted out,” he said. “Until that’s done, it’s going to affect confidence.”

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