One of China’s biggest problems is called Country Garden. A huge, highly indebted real estate company bears this pretty name. He is threatened with collapse.
Late last year, Country Garden looked like it was weathering the liquidity crisis that has gripped China’s real estate sector. The state-controlled bank PSBC had granted the ailing real estate financier a whopping credit line of the equivalent of seven billion dollars. But even that bazooka lacked firepower.
Because nine months later, Country Garden threatens to run out of money. The company has amassed $200 billion in debt and expects to post a loss of up to $7.6 billion in the first half of the year alone. This imbalance is reminiscent of that of the other Chinese real estate giant China Evergrande, which is struggling with debts equivalent to $340 billion and is to be restructured under state supervision.
China’s real estate sector had experienced an unprecedented boom since the late 1990s – which, however, was financed on credit. In 2020, the leadership in Beijing enacted measures to stop over-indebtedness and let air out of the real estate bubble. Since then, the industry, which accounts for around a quarter of China’s economy, has been in crisis: prices are falling and money is running out.
Country Garden was founded in 1992. At that time, China’s leadership cleared the way for private companies to promote the country’s urbanization. Country Garden grew rapidly and became China’s largest real estate developer in terms of sales. The company was mainly active in the province and was considered stable even after the insolvency of China Evergrande.
Payments are due
But that was a mistake. Last week it became clear how big Country Garden’s lack of money is. The company failed to make payments due on $22 million of bonds placed overseas. The company now has 30 days to catch up – otherwise there is a risk of bankruptcy. The rating agency Moody’s downgraded the credit rating.
The non-payment caused investors to part with the company’s bonds and throw them on the market. This led to a fall in prices. In order to stop this, trading in part of the bonds was suspended indefinitely, including bonds placed on the domestic market. More than nine billion yuan ($1.25 billion) in interest on domestic bonds will fall due in September – but Country Garden does not have that much money, according to the business newspaper “Caixin”. According to Moody’s, 31 billion yuan ($4.27 billion) in debt will mature next year.
The tough corona lockdowns in China had at times almost brought construction activity in China to a standstill. After the end of the Corona measures, it started again, also because the government had asked banks to provide some developers with fresh money – including Country Garden.
But since the second quarter, given China’s meager economic situation, business has been going down again. Country Garden’s real estate sales have also plummeted in recent months. In July they were 60 percent below the previous year’s level.
Share price plummets
The difficulties are exacerbated by the business model of many of the Chinese real estate developers, which Country Garden also relies on: customers pay for their apartment in full before it is completed. These advance payments are then used to finance new construction projects. The company’s liquidity difficulties are now causing many customers to fear that the apartment they have already paid for will be built much later or maybe not at all. This intensifies the crisis of confidence in the sector triggered by Evergrande – and ensures that the Chinese are becoming even more cautious when buying real estate.
Meanwhile, the company’s shares have plummeted nearly 40 percent over the past week — a further 15 percent this month.