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When the state-backed Postal Savings Bank of China unveiled a Rmb50bn ($7bn) credit line to Country Garden in November, it appeared China’s biggest private homebuilder would survive a sector-wide liquidity crisis.
Nine months later, it is dangerously short of cash. The company expects to have lost Rmb45bn-Rmb55bn in the first half of the year and is confronting what it calls “the biggest difficulties” in its history.
Country Garden this week confirmed it had missed payments of $22.5mn on two of its international bonds, sending shockwaves through the country’s struggling real estate industry. Its share price fell to a record low on Friday, hitting the fortune of chair Yang Huiyan, formerly Asia’s richest woman.
At almost $200bn, Country Garden’s liabilities are comparable with the $340bn held by Evergrande, whose collapse in 2021 triggered a series of other defaults. But Country Garden’s status as a top developer — until recently deemed safer than many of its highly levered peers — means any eventual default has deep ramifications.
Country Garden’s woes show how deeply entrenched a two-year property crisis has become in China, casting doubt on the viability of the private developers that for decades drove the country’s urbanisation and economic growth.
Its fate will also test Beijing’s determination to reform the housing market after introducing regulations restricting leverage in 2020. The government has already shown signs of softening those rules.
“We haven’t had a comprehensive package of plans to revitalise the sector, so we are going to continue to see defaults,” said Andrew Lawrence, Asia property analyst at TS Lombard.
The slowdown across the property sector, which accounts for more than a quarter of China’s economic activity, has come at a critical moment for Beijing, with the economy facing trade headwinds and deflationary pressure.
“There are no good options [for the government] at this point,” said Brock Silvers, chief investment officer at private equity firm Kaiyuan Capital. “Ultimately the insolvency of the real estate sector must be addressed.”
Country Garden was founded in 1992, when nationwide reforms paved the way for private sector businesses to drive urbanisation in China. It eventually grew to become the country’s biggest developer by sales, which exceeded half a trillion renminbi in each year from 2018 to 2021.
After Evergrande and other developers defaulted in 2021, Country Garden was seen as stable, but there were concerns over its exposure to China’s third- and fourth-tier cities, which accounted for 60 per cent of its sales last year.
Like many developers in China, Country Garden heavily relied on customers “prepaying” before their flat was completed. Sales act as a crucial source of funding, with the proceeds then invested in new projects. In July this year, its sales slumped further to just 40 per cent of their level last year. They have dropped for four consecutive months, exacerbating a cash crunch at the company.
Homebuyers are “steering clear of all private developers in favour of state developers, given the risks of private developers going under”, said Mark Williams, chief Asia economist at Capital Economics.
Private developers in the top 50 in China made Rmb4tn of sales combined in 2021 but just Rmb1tn so far this year, according to Chinese property transactions data.
Against a backdrop of worsening sales, Country Garden has become one of the focal points of distress in financial markets. Last Monday the group pulled out of a deal at the last minute to raise $300mn through a share placement in Hong Kong, people familiar with the matter said, adding that investors had been lined up. The shares were set to be issued at a 17.7 per cent discount, and the proceeds would have been used to “repay indebtedness”, the company said.
Country Garden’s missed bond payments are in a 30-day grace period. It faces coupon payments on other notes, including offshore bonds, coming due every month for the rest of 2023, as well as a $1bn international bond in January.
The company said on Thursday it would “actively resolve” its liquidity pressures, adding that it believed the real estate industry would “return to a sound and stable development track”.
Another incident last week fuelled more speculation over the company’s health. Chair Yang, the daughter of Country Garden’s founder, transferred almost $1bn of her shares in its property services arm to a Hong Kong charity.
Property services businesses, which collect fees for managing residential buildings, have been valuable assets in the debt restructurings of other developers such as Evergrande and Sunac.
An investor said one interpretation in the market was that the move might have been an attempt to “ringfence” the shares. Country Garden declined to comment.
UBS analyst John Lam wrote in a note to clients that “the timing of the donation seems unusual to us” and that it was a negative for Country Garden and the services arm.
Investors are watching for signs that Beijing might shift its policy to give more support to stressed developers.
“Given they [Beijing] let Evergrande default, that’s quite a clear signal nothing is too big to fail, but we have seen indirect support over the past couple of years, said Sandra Chow, co-head of Asia-Pacific research at CreditSights, adding it was “hard to know what’s happening behind the scenes”.
Country Garden was one of several non-state-owned developers eligible for government financing support, but there are signs it has not materialised.
Data published by the People’s Bank of China on July 19 shows only Rmb500mn has been used across four policy tools that were designed to support funding for the sector.
The PBoC last week held a meeting with several other private developers, including CIFI, whose presence was notable because it had already defaulted on its debts. Country Garden was not present.
Silvers of Kaiyuan Capital said it was likely that Country Garden’s $22.5mn payments would be made and the authorities might pressure Yang, who is leading a task force to address the company’s woes, to personally cover the cost.
But while this may “avoid an immediate default, by itself it still won’t do anything to slow the real estate sector’s implosion”, he said.
Additional reporting by Cheng Leng and Hudson Lockett in Hong Kong
