Real estate construction is a far more significant driver of China's economy than in the US. It's estimated that the sector compromises 30% of its GDP.
That sector is now in free fall with its two giant developers (Evergrande and Country Garden) defaulting on debt and watching unsold inventory take down their prospects for survival.
The US real estate crash through the globe into recession (2008). Will China's current problems similarly impact things here at home? Probably yes? Perhaps not as significantly (we hope).
China’s Country Garden Succumbs to Debt Crisis After Sales Plunge
Property giant fails to repay a loan and warns that it is unlikely to pay off all its international debt obligations
By Rebecca Feng, WSJ
Updated Oct. 10, 2023 4:42 am ET
HONG KONG—Chinese property giant Country Garden failed to make an international debt payment after its apartment sales plunged in September, succumbing to a liquidity crisis that worsened over the past few months.
The 31-year-old developer said it wasn’t able to repay a $60 million loan denominated in Hong Kong dollars that was due. Country Garden said it also doesn’t expect to meet all its U.S. dollar bond and other offshore debt obligations when they come due, or within grace periods—effectively saying that it expects to default. The company has hired financial advisers and plans to hold talks with its offshore creditors.
Country Garden said its sales have come under “remarkable pressure,” which worsened its problems. The developer’s contracted sales in the first three quarters of this year dropped 44% from a year earlier to the equivalent of about $21 billion. The drop was particularly steep in September, when Country Garden’s sales plummeted 81% to just $846 million, it said in a regulatory filing.
The developer is one of the biggest and most surprising casualties of China’s deepening housing downturn. Barely a year ago, Foshan-based Country Garden was held up as a model developer by Chinese authorities and was widely expected to withstand a broader slump in new-home sales. State-owned banks showered it with credit, and the developer also raised money in Hong Kong by selling shares in late 2022. Country Garden bought land in a public auction earlier this year before its cash started dwindling.
Country Garden had the equivalent of $187 billion in liabilities as of June this year, including $15.3 billion in international bonds and loans, according to its financial statements.
Last month, it narrowly avoided defaulting on its dollar bonds by making interest payments on two securities before the end of a 30-day grace period. The developer also extended the maturities on $2 billion in yuan-denominated bonds in mainland China.
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The crisis at Country Garden, which has many residential projects in China’s poorer and less developed cities and provinces, is likely to prolong a broader housing downturn that has already damaged consumer confidence and become a problem for the broader economy. Economists have warned that the property-sector malaise could also strain the finances of local governments that have depended heavily on revenue from land sales to developers.
It also comes as China Evergrande Group, which defaulted on its U.S. dollar bonds in late 2021, becomes engulfed by more problems. Evergrande has yet to deliver hundreds of thousands of apartments that it presold to Chinese citizens, and its chairman is being investigated for potential crimes.
On Monday, some of Evergrande’s international creditors expressed dismay at the recent cancellation of the developer’s $35 billion offshore debt-restructuring deal, and warned that it could lead to an “uncontrollable collapse” of the group and potentially catastrophic effects.
Authorities in China are under growing pressure to resuscitate the housing market and have tried different ways to arrest declines in new home sales. In late August, the country’s central bank cut the minimum down-payment ratio for mortgages, to make it easier for people to borrow money to buy homes. Regulators have also broadened the definition of first-time home buyers, so that more people can qualify for housing subsidies, and local governments in many cities have dropped other purchase restrictions.
Monthly new-home sales have continued to fall on a yearly basis despite those changes. In September, total sales at China’s 100 largest developers dropped 29% from the same month last year, according to China Real Estate Information Corp., a private industry data provider.
“There was a short-lived and somewhat shallow bounce in China property sales after the government’s latest demand-side easing measures,” said Owen Gallimore, head of credit analysis for Deutsche Bank’s Asia-Pacific flow-trading desk. “Developers are routinely seeing their sales drop sharply once willingness and ability to pay is questioned,” he added.
Country Garden said on Tuesday that it will “make its best effort to ensure the delivery of properties,” which it said was the top priority for its business. The developer, like most of its peers, presold many partially built homes with promises to complete them in the future. It delivered nearly 700,000 housing units last year, and about 420,000 homes in the first nine months of 2023.
International investors had already been bracing for a Country Garden default, which would follow dollar-bond defaults at more than 30 other Chinese real-estate developers since 2021. Prices of Country Garden’s dollar bonds slid below 10 cents on the dollar in August, according to FactSet data. The company’s Hong Kong-listed shares had also been relegated to penny-stock status, and were dropped from the benchmark Hang Seng Index in September.
Country Garden’s hiring of financial advisers indicates that the developer is planning to restructure its debt, CreditSights said in a note on Tuesday. That also means the company likely won’t be paying its U.S.-dollar bond coupons as those obligations come due, the debt research firm said.
“At this stage, the damage to investor and home buyer sentiment has already been done,” said Charles Chang, who oversees China corporate ratings at S&P Global. He added that investors and other residential real-estate developers will likely lower their projections for China property sales.
Serena Ng and Frances Yoon contributed to this article.
Write to Rebecca Feng at rebecca.feng@wsj.com
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