China’s government is trying to reassure jittery homebuyers after a major real estate developer missed a payment on its multibillion-dollar debt, reviving fears about the industry’s shaky finances and their impact on the struggling Chinese economy.

There is no indication Country Garden’s problems might spread beyond China, which seals off its financial system from global capital flows, economists say. But they highlight the industry’s struggle under pressure from the ruling Communist Party to reduce soaring debt that is seen as an economic threat. That has bankrupted hundreds of small developers and depressed China’s economic growth.

The Country Garden episode has echoes of Evergrande Group, which is trying to restructure more than $340 billion owed to banks and bondholders. Fears of a possible Evergrande default in 2021 rattled global markets, but they eased after the Chinese central bank said its problems were contained and Beijing would keep credit markets functioning. A central bank official said in March that financing conditions have “improved significantly.”

Financial markets were rattled when Country Garden Holdings Co. missed two payments totaling $22.5 million due to buyers of dollar-denominated bonds on Aug. 6. It has a 30-day grace period before it would be declared in default.

Government reassurances

A government spokesperson tried to reassure the public and financial markets, saying conditions are improving and regulators are getting debt under control.

“The risks of housing enterprises are expected to be gradually resolved,” said Fu Linghui of the National Bureau of Statistics.

Policy changes “will help boost market confidence,” Fu said at a news conference. “Housing consumption and housing enterprises’ willingness to invest are expected to gradually improve.”

On Thursday, a half-dozen homebuyers sat outside a Country Garden development under construction in Beijing beside a sign that said they have been “fighting for their rights” for 97 days.

The homebuyers, who sat under tent in 31 C (89 F) heat, declined to talk to a reporter but a security guard said their complaint stemmed from a Country Garden project in Malaysia.

Country Garden, previously seen as one of China’s financially healthiest developers, suspended trading of its bonds Monday on Chinese exchanges. That followed a warning last week that it might post a loss of as much as 55 billion yuan ($7.5 billion) for the first half of 2023.

Abroad, the impact “seems likely to be limited,” said Jennifer McKeown of Capital Economics in a report.

Foreign investors pulled out of Chinese real estate after earlier defaults and “policymakers should step in to prevent a meltdown in China,” McKeown said.

Real estate propelled China’s economic boom, but developers borrowed heavily as they turned cities into forests of apartment and office towers. That helped to push total corporate, government and household debt to the equivalent of more than 300% of annual economic output, unusually high for a middle-income country.

After years of warnings that led to global rating agencies cutting the Chinese government’s credit rating in 2017, the ruling party cracked down on real estate debt in 2020. It imposed controls known as “three red lines” that prohibit heavily indebted developers from borrowing more to pay off bonds and bank loans as they matured.

A weak real estate industry complicates efforts by Chinese leader Xi Jinping’s government to reverse a deepening economic slump after a rebound following the end of anti-virus controls fizzled out sooner than expected.

Economic trends

The economy grew by a robust 2.2% over the previous quarter in the January-March period. But that fell to just 0.8% in the three months ending in June. That is equal to a 3.2% annual rate, which would be among China’s weakest in decades.

Revving up real estate spending was the ruling party’s solution for previous downturns. Xi’s government has eased restrictions on borrowing by developers and told banks to lend to homebuyers. But it appears to be trying to stick to its overall debt-reduction goal.

Real estate accounts for some 20% of China’s economy. When spending on steel and copper for construction, furniture and other related purchases is added in, estimates of its share of the economy rise as high as 35%.

Real estate’s troubles are causing a vicious cycle by prompting jittery households to put off housing, auto and other big purchases, which in turn depresses economic activity further. Auto sales shrank 2.6% in July from last year’s already depressed level under anti-virus curbs.

Potential impact

Country Garden’s debt struggle might “drive potential homebuyers away from privately owned developers,” Moody’s Investors Service said in a report. That would “weaken effects of any potential supportive measures by the government to stabilize property sales.”

The industry also might be squeezed as investors and banks shy away from lending to smaller developers, Moody’s said.

In a sign of weak demand, prices paid for new homes fell for a second month in July, according to the statistics bureau. Prices in 35 smaller cities declined 0.3% from June. Prices in 31 bigger cities edged down 0.2%.

Sales of land use rights are down, adding to the strain on local governments that are trying to manage debt burdens that swelled with the expense of fighting the COVID-19 pandemic.

Billions in losses

Country Garden was founded in 1992 by Yang Guoqiang, a former farmer and construction worker. Yang handed over his shares in 2005 to his 25-year-old daughter, Yang Huiyan. She was ranked the richest woman in Asia by Forbes magazine with a net worth of $11 billion.

Yang Huiyan’s fortune rose to $33.1 billion in 2020, making her the 11th-richest private individual in China, according to Hurun Report, which follows the country’s wealthy. Forbes estimated this week that plunged almost 90% to $4.3 billion as Country Garden’s share price tumbled.

Country Garden’s possible losses are a sliver of those of Evergrande, headquartered in Shenzhen, adjacent to Hong Kong, which reported in June that it lost $81 billion in 2021-22.

But both ran into the same problem: They have more assets than debt but can’t turn slow-selling real estate into cash fast enough to repay lenders.

Country Garden reported 1.7 trillion yuan ($233 billion) versus 1.4 trillion yuan ($193 billion) of liabilities at the end of 2022. The business news magazine Caixin cited an unidentified source who said the developer might have an additional 200 billion yuan ($27 billion) in debt.

The developer had only 147.6 billion yuan ($20 billion) of cash. Some 60 billion yuan ($8 billion) was buyer deposits and other money that couldn’t be freely used.

Country Garden, headquartered in Shunde, near Hong Kong, said Aug. 10 sales this year through July fell 35% from the same period of 2022 to 140.8 billion yuan ($19.3 billion). It said July sales fell 60%.

“The company has encountered the biggest difficulties since its establishment,” its president, Mo Bin, said in a statement.

Country Garden had outstanding bonds and asset-backed securities of 104 billion yuan ($14.25 billion), including 78 billion yuan ($10.7 billion) of bonds sold abroad, according to Caixin. It said bonds worth 7.3 billion yuan ($1 billion) will mature in September.

The company also owes 162.5 billion yuan ($22.3 billion) to banks and other financial institutions, according to Moody’s.

Evergrande, the global industry’s most heavily indebted company, was big enough that regulators stepped in to supervise its debt restructuring, which has yet to be completed. But they avoided bailing out the company or its creditors to avoid sending the wrong message about the need to reduce debt.

Local authorities took control of stalled Evergrande building projects to make sure buyers got apartments that already were paid for.

Country Garden said in a July 31 statement it would “seek guidance and support from the government and regulatory authorities.”

Authorities have yet to say whether the company is a big enough risk for regulators to get involved in its restructuring or take over building projects.
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Embattled developer China Evergrande Group has filed for bankruptcy protection in a U.S. court as part of one of the world’s biggest debt restructuring exercises, as anxiety grows over China’s worsening property crisis and a weakening economy.

Once China’s top-selling developer, Evergrande has become the poster child of the country’s unprecedented debt crisis in the property sector, which accounts for roughly a quarter of the economy, after facing a liquidity crunch in mid-2021.

The developer has sought protection under Chapter 15 of the U.S. bankruptcy code, which shields non-U.S. companies that are undergoing restructurings from creditors that hope to sue them or tie up assets in the United States.

The filing is procedural in nature, but the world’s most indebted property developer with more than $300 billion in liabilities has to do it as part of a restructuring process under U.S. law, two people familiar with the matter said.

The sources declined to be named due to the sensitivity of the matter.

Evergrande declined to comment.

Evergrande’s offshore debt restructuring involves a total of $31.7 billion, which include bonds, collaterals and repurchase obligations. It will meet with its creditors later this month on its restructuring proposal.

A string of Chinese property developers have defaulted on their offshore debt obligations since then, leaving unfinished homes, plunging sales and shattering investor confidence in a blow to the world’s second-largest economy.

The property sector crisis has also fanned contagion risk, which could have a destabilizing impact on an economy already weakened by tepid domestic consumption, faltering factory activity, rising unemployment and weak overseas demand.

A major Chinese asset manager missed repayment obligations on some investment products and warned of a liquidity crisis, while Country Garden, the country’s No. 1 private developer, has become the latest to flag a stifling cash crunch.

All of this comes at a time when property investment, home sales and new construction have contracted for more than a year.

Morgan Stanley this week followed some of the major global brokerages to cut China’s growth forecast for this year. It now sees China’s gross domestic product (GDP) growing 4.7% this year, down from an earlier forecast of 5%.

China is targeting 5% annual growth for this year, but an increasing number of economists are warning that it could miss the goal unless Beijing ramps up support measures to arrest the decline.

The China economic and property woes as well as the absence of concrete stimulus steps have sent a chill through global markets. Asian shares were headed for a weekly loss of 2.8%, the third straight week of declines. Chinese blue-chips on the CSI300 dropped 0.5% and Hong Kong’s Hang Seng Index slumped another 1.3%.

China is expected to cut lending benchmarks at a monthly fixing on Monday, with many analysts predicting a big reduction to the mortgage reference rate to revive credit demand and shore up the ailing property sector.

Debt restructuring

In response to the deepening property market crisis, the central bank reiterated it would adjust and optimize property policies, according to its second-quarter monetary policy implementation report published this week.

Since the sector’s debt upheaval unfolded in mid-2021, with Evergrande at the center of the turmoil, companies accounting for 40% of Chinese home sales have defaulted, most of them private property developers.

As developers scramble to ease investors’ concerns, Longfor Group, China’s second largest private developer, said on Friday it would speed up its “profit structure” in response to the changes of supply and demand in the real estate market.

Evergrande announced an offshore debt restructuring plan in March, expecting it to facilitate a gradual resumption of operations and generation of cash flow. It is now gathering creditor support to complete the process.

An affiliate of the developer, Tianji Holdings, also sought Chapter 15 protection on Thursday in Manhattan bankruptcy court.

In a filing in the Manhattan bankruptcy court, Evergrande said that it was seeking recognition of restructuring talks underway in Hong Kong, the Cayman Islands and the British Virgin Islands.

The company proposed scheduling a Chapter 15 recognition hearing for Sept. 20.

In June last year, another Chinese developer, Modern Land (China) Co. Ltd., which missed payments on its offshore bonds that were due in October 2021, had filed a petition for recognition under Chapter 15 of the bankruptcy code in New York.

Trading in China Evergrande shares has been suspended since March 2022. Shares of Evergrande Services plunged as much as 20% on Friday, while China Evergrande New Energy Vehicle Group lost as much as 17%.
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