Unveiling Country Garden: China's Driving Force Behind the Soaring Property Crisis

China's protracted real estate crisis now has a new figurehead, stepping in for Evergrande - Country Garden. Previously the largest homebuilder in the country, Country Garden has recently defaulted on an international bond, marking its first instance of failure to make payment within the grace period, which ended last week.

Country Garden has not provided any response to requests for comment through phone or email. Citigroup, the reported trustee responsible for ensuring that the bond terms are upheld, has declined to comment.

The developer, which holds $190 billion in liabilities, has managed to avoid defaulting on several occasions in the past month. However, the continuous weakness of China's property market and the challenging refinancing situation have hindered its ability to generate sufficient funds to repay the $15 billion debt maturing by June 2024. Earlier this month, it issued a warning to investors regarding a possible default.

The company is now on the path of debt restructuring, potentially leading to a turbulent financial collapse, which could have a profound impact on China's struggling economy. Here is an overview of Country Garden's journey from success to decline and the implications it holds for the once thriving property sector in China.

What is Country Garden?

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

Based in Foshan, Guangdong province and listed in Hong Kong, the company has successfully completed 3,000 projects nationwide, transforming over 1,400 rural towns into urban areas. While specializing in commercial real estate including hotels, parking lots, and retail stores, the company has also diversified its operations into robotics and agricultural services.

The company's recent annual report states that it employs around 300,000 individuals, contributing significantly to the job market in China. However, the formerly resilient firm is currently grappling with a financial crisis. Its apartment sales experienced an alarming 81% decline in September compared to the previous year, leading to a record loss of $7 billion for the first half of 2023.

How did it get here?

echoes the challenges faced by Evergrande, a previously dominant Chinese developer that experienced a default in 2021. Having suffered losses of $81 billion over the past two years, Evergrande filed for bankruptcy in the United States in August.

Following the Evergrande debacle, Chinas real estate sector has witnessed wavering confidence. However, in August, Country Garden's liquidity crisis made headlines once again, reigniting concerns among investors. The company's failure to make interest payments on two US dollar bonds drew significant scrutiny and shed light on its broader debt issues.

On October 10, it announced that it had failed to make a payment of 470 million Hong Kong dollars ($60 million) on a bond that was approaching its maturity. The company also expressed concern that this non-payment could result in creditors requesting immediate repayment of outstanding debts or initiating legal actions against the company. For several months, investors have been anticipating a potential default by Country Garden, which could have significant repercussions on the second largest economy in the world as the real estate sector contributes approximately 25% to 30% of China's GDP.

Hong Kong-based Country Garden shares have diminished to the status of a penny stock in the ongoing year. Furthermore, in August, the company was eliminated from its position as a component of the prominent Hang Seng Index in the city.

The aforementioned enterprise is led by Yang Huiyan, a prominent figure among China's wealthiest women. To revive the distressed business, she has injected a substantial amount of her personal wealth. Unfortunately, as a repercussion, her fortune has experienced a profound decline proportionate to the decline in the stock price.

What next for Chinas 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 theres no end in sight to the crisis.

The International Monetary Fund (IMF) announced last week that the real estate market continues to hinder China's economy and will also affect global growth.

Despite the efforts made by Beijing to support the sector, data released last Thursday by the National Bureau of Statistics (NBS) indicated that new home prices have declined for the third consecutive month in September.

The real estate sector plunged into crisis over two years ago due to a government crackdown on developer borrowing. To stimulate growth, Beijing has implemented various measures such as reducing mortgage rates and eliminating restrictions on home purchases in cities.

During a recent press briefing, Krishna Srinivasan, the director of the IMF's Asia and Pacific Department, stressed the importance of China adopting a "comprehensive strategy" for real estate. This strategy should prioritize the completion of all pre-financed houses, as it is common practice in China to sell new homes before their construction is complete.

"Theres a problem with the developers, which needs to be sorted out," he said. "Until thats done, its going to affect confidence."