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Country Garden: Why Its Financial Crisis Poses a Risk to China

Country Garden, a Chinese real estate giant, has lost billions of dollars and racked up $200 billion in unpaid bills. It’s on the hook to deliver, by one estimate, nearly one million apartments across hundreds of cities in China.

The privately owned developer, founded by a farmer three decades ago, is inching closer to default.

In China’s housing market, there are plenty of deadbeat developers no longer paying their bills. The possible collapse of Country Garden is one to pay attention to.

The company has tried to project confidence. “One shall pick himself up from where he has fallen,” Mo Bin, Country Garden’s president, said last week, pledging to “spare no effort.”

But the problem is much bigger than one company, and the timing could hardly be worse. A default by Country Garden would be the latest in a string of collapses in a housing market that has been hurting for years. Emerging from paralyzing lockdowns during the pandemic, China’s leaders badly need the country’s economic engine to pick up. Instead, growth is sputtering as housing prices fall, people spend less and consumer and business confidence wanes.

Now, experts fear that Country Garden’s troubles will spill over into the broader financial markets, thwarting any possible recovery of the real estate industry and spreading the damage through the economy.

A year ago, Country Garden was a model corporate citizen in an expanding universe of delinquent real estate companies that borrowed recklessly and then stopped paying their bills.

Country Garden, founded by Yang Guoqiang in 1992, was a beneficiary of the world’s biggest real estate boom. Its success turned Mr. Yang into a billionaire and became a testament to the country’s remarkable growth. Chinese people, having few other reliable options to build wealth, invested their incomes and savings in real estate. Like other big private developers, Country Garden kept borrowing and often borrowed more to pay back its loans, operating on the assumption that as long as it continued to expand, it could keep repaying its debt.

But the bills grew so big that the authorities began to fear the debt would threaten the broader financial system. China’s top leader, Xi Jinping, ordered that homes should be for living, not for speculation. In 2020, the government cracked down, limiting the ability of real estate companies to raise money and prompting a series of defaults.

Even as other developers stopped paying their bills, Country Garden continued to make good on its obligations. It began to rely more heavily on the revenue from selling apartments before they were finished and using that money to help finance its operations.

A slump in home buying this year has placed the company in a crisis, facing what it described as the “biggest difficulties since its establishment.”

Markets, investors and home buyers are fearing the worst. In early August, Country Garden skipped two interest payments on loans. If it does not pay up by early September or get the creditors to give it more time after that 30-day grace period, it will default. Investors are not likely to lend it more money if that happens. The company’s share price has fallen below $1 in Hong Kong.

Country Garden’s losses are mounting. It has said it expects to report a loss of as much as $7.6 billion in the first six months of the year.

Even if people were still buying Country Garden’s apartments, they would not be able to buy enough of them to make up the financial shortfall, experts said. Besides, who wants to buy an apartment from a company that might not be around to finish building it?

All of this has led to worries that Country Garden will end up like China Evergrande, a real estate behemoth that collapsed in 2021 and set off panic in global markets.

“The Country Garden default could be as influential as Evergrande simply because it is so huge,” said Rosealea Yao, a real estate analyst at Gavekal, a China focused research firm.

And it could be even worse. A handful of big developers have already defaulted. The market is more on edge than it was when Evergrande failed. Policymakers, while recently vowing to support the housing market, have not done enough to bolster confidence.

“Things may get worse before the government reacts,” Ms. Yao said.

Maybe. Chinese policymakers have pulled all the stops before. And after years of tightening the screws, China’s top leadership has signaled a pivot in its approach, pledging to adjust its policy and take steps like lowering interest rates to make it easier to buy apartments.

But the measures so far have not been big enough to reverse the housing slump. Policymakers are unlikely to go back to the days when companies could amass huge piles of debt for speculative projects.

The housing market is also no longer growing like it did during the real estate boom that urbanized much of China in the 1990s and early 2000s.

China’s leaders have made it clear that the country cannot depend so heavily on real estate for economic growth. Gone are the days of real estate bubbles fueled by banks and investors throwing money at developers. More likely, some experts said, is that policymakers will do their best to make sure buyers get the apartments they paid for.

Many big questions remain unanswered. What, for example, happens to the Chinese economy if developers like Country Garden never pay back suppliers like painters and construction workers?

By one estimate from Gavekal Research, unpaid bills from private Chinese developers total $390 billion.

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Mohammad SHiblu

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