China’s biggest homebuilder struggles to survive as economic crisis deepens

When Country Garden, the biggest developer in China’s increasingly troubled real estate sector, released its annual report in April, Cover design Hope expressed: A phoenix spreads its wings.

The agency said the figure shows China’s economy is „back on track” and that „growth will soar to new heights” this year.

It was a desire.

Shortly after the report was released, China’s nascent economic recovery lost steam and an already sluggish real estate market began to collapse. In Country Garden, presales of unfinished apartments, a key indicator of future returns, fell more than 50 percent in June and July, more than double the decline in the previous five months.

For the past three years, Country Garden has been an outlier as dozens of large property developers have taken on too much debt over the years. But last month, it missed two interest payments — even with $187 billion in debt, signaling that it is at risk of financial collapse.

A country garden prevents an immediate accident. On Tuesday it said it paid creditors $22.5 million in interest. On Friday, the company won last-minute approval from lenders to defer repayment of $537 million in yuan-denominated bonds due on Monday through 2026, according to documents shared by Country Garden.

Last week, after reporting a $7.1 billion loss for the first six months of 2023, Country Garden said there were „material uncertainties that cast substantial doubt” on its ability to avoid bankruptcy. The company is struggling to raise cash and keep its creditors at bay, selling stakes in assets and issuing shares at a discount.

This has caused a dramatic decline in the country’s plantations. The company’s unlikely rise from a regional homebuilder to a nationwide behemoth has tracked China’s own meteoric rise. Now, its decline reflects the speed and severity of the country’s real estate slump, which threatens to derail the broader economy.

Kenneth Rogoff, a Harvard University economics professor who has written extensively about China, said, “As big as Country Garden is, it is a canary in a coal mine.

To shore up the faltering real estate market, China’s financial regulators took a series of measures on Thursday, including lower minimum down payments for first-time buyers and cutting interest rates on existing mortgages.

These and previous measures may not be enough to save the debt-ridden Country Garden.

Many Country Garden bonds trade for pennies on the dollar, leaving lenders with little hope of repayment. And the company’s share price is now below 1 Hong Kong dollar, once one of China’s largest private companies, whose stock traded at more than 17 Hong Kong dollars five years ago.

Country Garden was founded by Yang Guoqiang, a former farmer and construction worker. Dropped out of school because he couldn’t afford the $1 tuition.

The company began developing properties in 1997, when China began changing rules on private ownership of real estate. When it went public in 2007, the company told investors that one of its strengths was its large holdings of low-cost land. It also claims it can build faster and cheaper than competitors.

Two years before the public offering, Mr. Yang transferred 70 percent of his shares to his second daughter, Yang Huyen, who was then a manager in the company’s procurement department. When Country Garden’s shares were listed, 25-year-old Ms Yang became Asia’s richest woman, eventually worth an estimated $29 billion. Ms. Yang was co-chairman with her father until this March, when she assumed the role exclusively, who remains Country Garden’s majority shareholder.

Moving in lockstep with the government’s urbanization drive, the country estate expanded rapidly. It branched out beyond its home province of Guangdong and pushed aggressively into China’s less developed third- and fourth-tier cities, after 2015, as part of a national „shantytown redevelopment” program in which China began paying residents to trade. In dilapidated shacks in small towns and cities.

The company succeeded with a high-turnover strategy: build fast, sell fast and get paid fast. This allowed Country Garden to sell affordable homes while still making more profit than competitors. As real estate became the backbone of China’s economy and a key investment for many Chinese families, Country Garden emerged as one of the country’s largest non-state-owned enterprises.

Attracting buyers like Zhou Qizhou, Country Garden has sold more homes than any other developer in the past six years.

In 2019, he bought a country garden apartment in Enshi, a small city in central China. Mr. Although Zhu worked in Shanghai, he felt the pressure to buy a house if he couldn’t afford one later. Although he described the quality of construction, he was impressed by the speed of construction and low cost, and bought the 115 square meter (about 1,200 square feet) apartment for about $125,000. He regrets buying before the market softened.

„At the end of the day, Country Garden is still a big brand,” Mr. Zhou said.

But the once insatiable demand for real estate has evaporated and China’s economy is faltering. Companies like Country Garden are struggling with the effects of crippling Covid lockdowns, reckless borrowing by property developers and a government crackdown on years of prioritizing state-owned businesses over private companies. The economic downturn is most severe in small towns, where local economies have not kept pace with the building boom. Now those cities are awash in empty apartments.

When Country Garden recently revealed its massive first-half loss, it said it had „failed to understand the potential risks associated with its disproportionately large investment” in smaller towns.

Until recently, the country garden was hailed as a survivor of industrial turmoil. The government has shown a greater willingness to support the company, although Beijing has not pushed back other big housebuilders, including the now-bankrupt property developer Evergrande, which once rivaled Country Garden for market dominance.

When China’s financial regulators released a 16-point guide to help the property industry in November, Country Garden was placed on a „white list” of quality developers to prioritize financial support and credit lines from state-owned banks. According to Chinese media reports.

Over the years, Country Garden has maintained close ties with the ruling Communist Party. Its founder Mr. Yang worked at the Chinese People’s Political Consultative Conference, a national political advisory body. The Country Garden Initiative supported policy initiatives such as distribution of sewing machines and farm equipment in impoverished areas under the banner of „Poverty Eradication”.

While Country Garden’s finances have deteriorated, policymakers have prioritized ending construction of pre-sale homes. It completed pre-sales of nearly 700,000 units last year and another 278,000 units in the first half of this year.

However, in its latest earnings report, Country Garden said it is focusing on improving its cash flow and cutting costs. It now employs about 58,000 people, less than half the number of full-time employees in 2018. The company declined to provide additional comment beyond its public announcements.

In the earnings report, the company said it „deeply regrets” its current predicament, but said it will „never succumb to passive failure.” At a company meeting earlier this year, Mr. When Yang spoke to the staff, he emphasized perseverance.

„Don’t fall down before dawn,” he said. According to the company’s WeChat account. „We must live until spring comes, and spring will surely come.”