On Wednesday, Country Garden reported a colossal financial loss of $6.7 billion for the first half of the year. There is no escaping the fact that Country Garden’s debt could amount to more than $150 billion as it braces a potentially catastrophic default.
Country Garden, one of China’s largest real estate developers, is now struggling to meet its debt obligations. It is now within a 30-day grace period to make interest payments on two loans. If Country Garden fails to make these payments, it could default on its debts and trigger a financial crisis.
The problems at Country Garden could have serious implications for the Chinese economy. The company is a major employer and taxpayer, and its collapse could lead to job losses and a slowdown in economic growth.
The Chinese government is likely to take steps to prevent Country Garden from defaulting, but the situation is still uncertain.
Country Garden’s Colossal Debt Pile
Country Garden’s debt situation came as it reported a record $6.7 billion (£5.2bn) loss for the first six months of the year. The Chinese developer said in the statement that it was “deeply remorseful for the unsatisfactory performance.”
Due to Country Garden’s financial crisis, it is also reportedly seeking to extend a deadline for the repayment of another bond. Country Garden’s financial loss announcement adds to concerns about the post pandemic recovery of the world’s second largest economy.
Chinese developer Country Garden’s loss of $6.7bn was reported amid fears of another Evergrande. Its tenuous state has sparked fears of a collapse that could have far-reaching consequences for the Chinese financial system two years after the fall of Evergrande.
Earlier this month, the company warned that Country Garden’s loss could be up to $7.6bn for the first six months of the year. The record Country Garden’s loss was at the bottom end of a 45bn yuan ($6.2bn; £4.9bn) to 55bn yuan estimate issued by the company.
Country Garden’s financial crisis
One of China’s biggest builders, Country Garden has racked up debts of more than $150bn and said this month it had failed to make interest payments on two loans.
It is one of the few major homebuilders to have avoided default since Beijing introduced a “three red lines” policy in 2020 that aimed to reduce debt levels in the highly leveraged sector. The red lines set limits on liabilities-to-asset ratios and ensure companies hold cash reserves equivalent to at least 100% of short-term debt.
If Country Garden does not meet a deadline for a bond payment at the beginning of September, it could become the biggest Chinese real estate firm to crash since Evergrande in 2021.
Country Garden’s debt effect on China
Country Garden, which was China’s largest real estate firm last year, has four times as many building projects underway as Evergrande. When the latter halted construction projects in recent times it infuriated home buyers, who held demonstrations and stopped making mortgage payments in protest.
The Country Garden’s financial loss and cash flow problems have fueled fears that it could spread turbulence through China’s economy and financial system.
The rise of the world’s second-largest economy has been largely founded on property and construction, which account for about a quarter of China’s GDP.
Country Garden’s financial loss
Country Garden’s losses from January to June were on par with estimates it made in early August of 45-55bn yuan. Over the same period a year ago, the group posted a small profit of 612m yuan.
“The shrinkage of the property sector, coupled with the not yet restored confidence of the capital market, exerted mounting pressure on the company’s business operation,” Country Garden said in its filing to the Hong Kong stock exchange.
The earnings report came out as Country Garden is negotiating with creditors to reschedule debt payments so as to avert default.
Country Garden on Wednesday also proposed issuing new stock worth 255m yuan.
The company has “tried its best” to make debt principal and interest payments, it said in the latest filing.
Country Garden’s debt and loss create a domino effect
Country Garden provides work for tens of thousands of people and is ranked by Forbes among the world’s 500 largest companies. Its boss, Yang Huiyan, was until recently the richest woman in Asia.
The woes of Country Garden and Evergrande are causing further weakness to a property sector hit hard by the pandemic and China’s economic slowdown. These problems also discourage potential homebuyers, which could pile pressure on other real estate firms.
In a sign of the market’s weakness, home prices in July fell at the quickest pace in a year, according to government figures.
Authorities are making moves to boost the key sector now, with major cities Guangzhou and Shenzhen taking steps to ease mortgage rules.
Stock update
Country Garden’s stock drop has been steep over the past month. The Country Garden shares were trading around 1% higher in Hong Kong on Thursday morning. Country Garden’s stock dropped by the end of the day.
