China’s largest homebuilder is struggling to survive as the economic crisis deepens

When Country Garden, the largest developer in China’s increasingly turbulent real estate sector, published its annual report in April, cover design Resurrected Hope: The phoenix spreads its wings.

The company said the picture showed that China’s economy was “back on track” and that this year would see “growth soar to new heights.”

That was wishful thinking.

Shortly after the report was released, China’s nascent economic recovery lost steam and the already stagnant real estate market began to collapse. And in Country Garden, unfinished apartment sales, a critical indicator of future earnings, fell more than 50 per cent in June and July, double the rate of decline in the previous five months.

Over the past three years, with dozens of major developers defaulting after years of excessive borrowing, Country Garden has been an anomaly. But last month, it defaulted on interest payments – suggesting it was also at risk of financial collapse, with $187 billion in debt.

Country Garden should get $22.5 million this week, which is the end of the grace period for missed payments. On Friday, the company secured last-minute approval from creditors to defer repayment of $537 million in yuan-denominated bonds, originally scheduled for Monday, until 2026, according to documents shared by Country Garden.

Last week, after reporting a loss of $7.1 billion for the first six months of 2023, Country Garden said there were “material uncertainties that may cast significant doubt” on its ability to avoid bankruptcy. The company is scrambling to raise cash and alienate its creditors, selling stakes in real estate and issuing shares at a discount.

It was a dramatic downfall for Country Garden. The company’s unlikely rise from regional homebuilder to national behemoth has traced China’s rapid rise. Now its collapse reflects the speed and severity of the country’s real estate collapse, which threatens to derail the broader economy.

“As big as a Country Garden is, it’s like a canary in a coal mine,” said Kenneth Rogoff, an economics professor at Harvard University who has written extensively on China.

In order to prop up the tottering real estate market, China’s financial regulators on Thursday introduced a series of measures, including lowering minimum payments for first-time buyers and lowering interest rates on existing mortgages.

These and other measures may not be enough to save the struggling Country Garden company from paying its debts.

Many Country Garden bonds are trading for pennies on the dollar, indicating that lenders have low hopes of getting repaid. The company’s share price is now less than HK$1, a sharp drop for what was once one of China’s largest private companies, which traded in excess of HK$17 five years ago.

Country Garden was founded by Yang Guoqiang, a former farmer and construction worker who grew up in such poverty that, according to a profile on a government website, he wore no shoes for the first 17 years of his life and nearly fell. out of school because he can’t afford the $1 tuition.

The company began developing real estate in 1997, at a time when China was beginning to change the rules for private ownership of real estate. When it went public in 2007, the company told investors that one of its strengths was a large reserve of low-cost land for development. It also said it can build faster and cheaper than competitors.

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

Country Garden expanded rapidly, keeping pace with the government’s urbanization drive. It has branched out far beyond Guangdong province, swooping into China’s less developed third- and fourth-tier cities, benefiting from the boom after 2015 when, as part of a national “shantytown redevelopment” plan, China began paying residents cash for trade. In dilapidated shacks in small towns and cities.

The company has been successful through a high turnover strategy: build fast, sell fast and cash out quickly. This allowed Country Garden to sell homes cheaper while still making more profits than competitors. As real estate has become the backbone of the Chinese economy and the main investment for many Chinese families, Country Garden has emerged as one of the largest non-state owned enterprises in the country.

Country Garden has sold more homes than any other developer over the past six years, courting buyers such as Zhou Qizhou.

In 2019, he bought an apartment in a country garden in Enshi, a smaller city in central China. Although Mr. Zhou was working in Shanghai, he felt pressured to buy a house in case he could not afford it later. He bought an apartment of 115 square meters (about 1,200 square feet) for approximately $125,000. He was impressed by the speed of construction and the low price, although he described the quality of construction as average. He only regrets that he bought right before the market fell.

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

But demand for real estate, once insatiable, has evaporated and the Chinese economy is floundering. Companies such as Country Garden have been squeezed by the effects of crippling coronavirus lockdowns, a government crackdown on reckless borrowing by real estate developers, and years of prioritizing state-owned companies over private ones. The economic downturn was most severe in smaller towns, where local economies did not keep up with the building boom. Now those cities are full of empty apartments.

When Country Garden recently disclosed its huge loss in the first half of the year, it said it “failed to understand the potential risks associated with its disproportionately large investments” in smaller cities.

Until recently, Country Garden was hailed as a survivor of the upheaval in the industry. And while Beijing has done little to prop up other major homebuilders, including Evergrande, the now bankrupt real estate developer that once rivaled Country Garden for market supremacy, the government has shown more willingness to shore up the company.

When China’s financial regulators issued a 16-point guideline in November to help the real estate industry, Country Garden was placed on a “white list” of high-quality developers to prioritize access to financial aid and lines of credit from state-owned banks. According to Chinese media reports.

For many years, Country Garden has maintained close ties with the ruling Communist Party. Its founder, Mr. Yang, worked for the Chinese People’s Political Consultative Conference, a national political advisory body. Country Garden has proactively supported policy initiatives such as distributing sewing machines and agricultural equipment to impoverished areas under the banner of “Poverty Alleviation”.

Even as the Country Garden Company’s finances deteriorated, it prioritized the wishes of policymakers by completing construction of previously sold homes. It finished nearly 700,000 pre-sold units last year and another 278,000 units in the first half of this year.

However, Country Garden said in its latest earnings report that it is focused on improving its cash flow and reducing 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 its earnings report, the company said it had “deep remorse” about its current predicament, but added that it “will never succumb to passive defeatism.” When Mr. Yang addressed employees at a company meeting earlier this year, he urged them to persevere.

He said, “Do not fall before dawn.” According to the company’s WeChat account. “We must live until spring comes, and spring will surely come.”