Financial Troubles at Country Garden Add to Concerns about China’s Economy
The collapse of China Evergrande in 2021 sent shockwaves through global markets and triggered a crisis in China’s housing market. Now, another major Chinese property developer, Country Garden, is facing financial troubles that are raising fresh concerns about China’s economy.
Country Garden, the biggest property developer in China in terms of sales, has experienced a significant decline in its stock market value this year. Investors are particularly worried about two recent events that have unfolded. Firstly, on August 1, the company scrapped a plan to inject cash into its business, which it desperately needs. Secondly, this week, the company missed two interest payments on its bonds, putting itself at risk of default. Although the bond payments represent a relatively small value, their non-payment has raised doubts about the company’s ability to repay in full.
The situation with Country Garden is alarming investors because the company had previously benefited from government measures to support the property market. It was even designated as a model developer by Chinese authorities. However, recent events have pushed Country Garden into a distressing situation that seemed unthinkable just a year ago when it was generating nearly $50 billion in sales. Now, there are concerns that Beijing’s increased support for the property market may not be sufficient.
Country Garden’s financial position has been severely impacted by a decline in sales of its apartment units. Fewer people in China are currently interested in buying properties, leading to a profit warning from the company in July. The overall property sector in China is also experiencing a downturn, while the government is attempting to stimulate it. However, many of the measures implemented primarily benefit larger cities, leaving companies like Country Garden, which operates in smaller cities, at a disadvantage.
While the missed bond payments do not represent a significant amount for Country Garden, the company has a 30-day grace period to make the payments and avoid triggering a default. However, if it fails to do so, it could scare off lenders who have previously provided financing. Country Garden did not provide any comment regarding the situation.
Country Garden’s potential default is seen as a worrying sign for China’s economic outlook. After three years of strict COVID-19 prevention measures that suppressed economic activity, China’s leaders are now looking to revitalize the economy. However, home sales have declined, and a significant number of young Chinese individuals are unemployed. This has resulted in reduced consumer spending, leading companies to slash prices. Furthermore, smaller cities, where Country Garden operates, are facing an oversupply of housing and a declining population.
The financial pressures faced by Country Garden are exacerbating concerns among nervous investors. The company has been performing worse than the broader market, and its sales under contract have dropped by nearly a third in the first half of this year. Even if Country Garden manages to make the interest payments on its bonds in the coming weeks, it still faces significant challenges. Moody’s reports that the company has bond payments due every month for the rest of the year and owes $2.4 billion to investors in China and $2 billion to foreign investors by the end of 2024.
Investors fear that the troubles faced by Country Garden could spread and create contagion within the market. Creditors who have continued to lend to private developers may become more hesitant to provide further financing. Additionally, potential homebuyers may be reluctant to engage with a company that is on the brink of collapse, as they have witnessed similar situations in the past.
The prognosis for Country Garden remains uncertain, and its current financial struggles contribute to growing concerns about the overall health of China’s economy.