Chinese property developer Country Garden warns it’s at risk of default


China’s largest property developer, Country Garden, warned that it is on the brink of default as it reported a staggering loss of almost $7 billion for the first half of the year, deepening a real estate crisis that threatens to unravel the country’s already fragile economy.

The saga of a company previously seen as one of China’s safest property developers and a pillar of the industry is the latest example of how real estate, which fueled the country’s economic boom, could prove its Achilles’ heel.

China’s property market accounts for about a quarter of its gross domestic product and two-thirds of household wealth, but post-pandemic uncertainty and a government crackdown on the sector have weakened sales and had knock-on effects on broader confidence in the economy.

In a filing with the Hong Kong Stock Exchange on Wednesday, Country Garden said it had failed to grasp and react to the risks of the ongoing real estate slump, most notably in smaller cities that are home to most of its developments.

“All these shortcomings have led to the most severe difficulty that the company has ever faced,” it said, adding that it “felt deeply remorseful for the unsatisfactory performance.”

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Country Garden — started in 1992 by a former farmer who later handed the company to his then-25-year-old daughter, Yang Huiyan, now one of the richest women in Asia — has been edging toward default for months.

One of dozens of Chinese developers that have been unable to pay their bills in the recent housing crisis, it has debts of more than $200 billion. This month, the company said it missed interest payments on two loans, putting it at risk of default.

In its Wednesday filing, Country Garden said continued deteriorating financial performance “may result in default.” The company said it is negotiating with creditors to avoid that.

A Country Garden default, which would be the largest since the collapse of Chinese property giant Evergrande in 2021, poses an especially large risk for leaders as they struggle to revive confidence in the Chinese economic miracle. The housing crisis further undermines the government’s target of 5 percent economic growth this year.

At a time when policymakers were depending on consumer spending to fuel a recovery after three years of the government’s paralyzing zero-covid policies, households have put off buying homes and other major purchases.

The Chinese economy has already been beset by rising youth unemployment, slowing manufacturing and depressed spending amid a extreme weather events.

On Monday, Evergrande — which is trying to restructure the more than $340 billion it owes — resumed trading in Hong Kong after its stock was suspended for 17 months. It quickly lost $2.2 billion, or almost 80 percent of its market value.

A Country Garden default is not expected to be as dire as that of Evergrande, but analysts say a collapse will only hurt China’s economy more, with ripple effects in everything from new construction and purchases of building materials to consumer spending and banking.

“Because a large part of Chinese households assets are attached to real estate, when home prices aren’t growing, or if they expect a weakening outlook on properties, people naturally feel they do not have as much money in their pockets,” said Gary Ng, a senior economist at investment management firm Natixis in Hong Kong.

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The risk of global contagion, however, is relatively low, Ng said. “I think the most important implication is that China may not import as much from the world as before,” he said. “But it’s quite unlikely that there will be a massive spillover.”

Starting in 2020, Chinese authorities imposed restrictions known as the “three red lines” to limit the amount of debt developers could take on. As the housing slowdown continued, authorities have resisted bailing out companies or propping up the market with stimulus measures as they have during past downturns.

Instead, officials have encouraged banks to lend more to home buyers, eased mortgage rules and extended tax rebates. So far, it hasn’t proved to be enough as home prices continue to collapse, especially in smaller cities.

Country’s Garden’s results, Ng said, show that many developers in China are still struggling and other developers in the private sector “may find it quite difficult to expand going forward.”

Theodora Yu in Hong Kong contributed additional reporting.


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