Country Garden, one of China’s largest real estate companies, is facing a financial crisis as it struggles with billions of dollars in losses and $200 billion in unpaid bills. The company, founded by a farmer 30 years ago, is on the hook to deliver nearly one million apartments across multiple cities in China.
The collapse of Country Garden could have significant implications for China’s housing market, which has been struggling for years. The timing couldn’t be worse as the country’s leaders hope for an economic recovery following the pandemic. However, instead of growth, there has been a decline in housing prices, reduced consumer spending, and a decrease in business and consumer confidence.
Experts are concerned that Country Garden’s troubles may have wider repercussions on the financial market and hinder any potential recovery in the real estate sector, causing damage to the overall economy.
So how did Country Garden find itself in this situation? A year ago, the company was considered a model corporate citizen among a sea of delinquent real estate developers who borrowed recklessly and failed to honor their financial commitments. As China’s real estate market boomed, Country Garden expanded rapidly, financing its operations through borrowing, under the assumption that continued expansion would enable it to pay off its debts.
However, the mounting debt became a concern for the authorities, and the government enforced stricter regulations on real estate companies’ ability to raise funds. This crackdown led to a series of defaults among developers, but Country Garden managed to keep up with its obligations by relying heavily on pre-sales revenue to finance its operations.
Unfortunately, the slump in home buying this year has pushed Country Garden into a crisis, with the company facing its biggest difficulties since its establishment. In early August, Country Garden missed two interest payments on loans, and if it doesn’t pay by early September or negotiate an extension, it will default. This has caused fear among markets, investors, and homebuyers, leading to a decline in the company’s share price.
Country Garden has already estimated a loss of up to $7.6 billion for the first half of the year. Even if people were still interested in buying their apartments, it wouldn’t be enough to cover the financial shortfall. This situation has raised concerns that Country Garden could end up like China Evergrande, a real estate giant that collapsed in 2021, causing turmoil in global markets.
The potential impact of a Country Garden default could be significant due to its sheer size. Several other major developers have already defaulted, and policymakers have yet to take sufficient actions to restore confidence in the market. Experts warn that things may worsen before the government responds.
While the government has previously announced measures to support the housing market, they haven’t been substantial enough to reverse the decline. China’s leaders have acknowledged the need to reduce the country’s dependence on real estate for economic growth. Policymakers may focus on ensuring buyers receive the apartments they paid for rather than allowing developers to accumulate massive debt for speculative projects.
However, many questions remain unanswered. The repercussions of developers like Country Garden failing to pay suppliers, such as construction workers and painters, could have severe consequences for the Chinese economy. According to Gavekal Research, unpaid bills from private Chinese developers amount to $390 billion.
In the coming weeks, the fate of Country Garden will be closely watched, and its potential default may have far-reaching implications for China’s real estate industry and the overall economy.