How Country Garden plays into China’s property mess

CHINA’S real estate crisis is rumbling on, depriving the world’s No 2 economy of one of its biggest growth drivers. A series of policy moves has failed to revive demand as homebuyers remain deterred by falling prices and concerned that troubled builders will struggle to finish apartments.

One of the biggest casualties of the slump is Country Garden, once China’s largest property developer, which posted a record loss in August and now faces potential liquidation. 

1. What is happening with Country Garden? 

Headquartered in the southern city of Foshan, Country Garden was China’s largest developer by contracted sales from 2017 – when it took the top spot from China Evergrande Group – through 2022. (It dropped to seventh place in 2023.) Its operations are focused in smaller cities, which expanded faster in good times but have been harder hit by the housing slump and economic slowdown than first-tier cities such as Beijing and Shanghai.

Country Garden has acknowledged it did not adopt timely measures to deal with the slowdown and failed to recognise the risks of its heavy reliance on lower-tier markets. In September, it missed initial deadlines to pay US$55.4 million on two dollar bonds, and in late October, after issuing a warning and hiring advisers, it was deemed to be in default. In late February, a Hong Kong court received a creditor’s petition to liquidate the company over non-payment of its debt. Country Garden chair Yang Huiyan, once Asia’s richest woman, has seen her fortune plummet. 

2. How big is Country Garden’s debt? How does it compare to Evergrande?

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Country Garden’s US$190 billion of total liabilities as at Jun 30 last year were well below Evergrande’s US$328 billion. However, Country Garden has more than 3,000 pending projects – four times as many as its rival – so a collapse of the firm would in all likelihood have a greater impact than Evergrande’s, according to Bloomberg Intelligence. 

3. What fuelled China’s property boom?

In 1998, China created a nationwide housing market after tightly restricting private sales for decades. Back then, only a third of its people lived in towns and cities. That has risen to two-thirds, with the urban population expanding by 480 million.

The exodus from the countryside represented a vast commercial opportunity for construction firms and developers. Money flooded into real estate as the emerging middle class leapt upon what was one of the few safe investments available, pushing home prices up sixfold over 15 years.

Local and regional authorities, which rely on sales of public land for a chunk of their revenue, encouraged the development boom. This also helped the central government to meet its annual targets for economic growth, which often hit double digits. At its peak, the sector directly and indirectly accounted for about a quarter of domestic output and almost 80 per cent of household assets. Estimates vary, but counting new and existing homes, plus inventory, the sector was worth about US$52 trillion in 2019 – about twice the size of the US real estate market.

4. What triggered China’s real estate slump?

The property craze was powered by debt as builders rushed to satisfy expected future demand. The boom encouraged speculative buying, with new homes pre-sold by developers who turned increasingly to foreign investors for funds. Opaque liabilities made it hard to assess credit risks. The speculation led to astronomical prices, with homes in boom cities such as Shenzhen becoming less affordable relative to local incomes than London or New York.

In response, the government moved in 2020 to reduce the risk of a bubble and temper the inequality that unaffordable housing can create. That touched off a cash crunch for developers that was exacerbated by the impact of aggressive measures to contain Covid-19. 

5. Did the government cause the crisis? 

State officials were anxious to rein in the industry’s debts, fearing that serial defaults could ravage China’s financial system. The government began to squeeze new financing for developers and asked banks to slow the pace of mortgage lending. New borrowing metrics introduced for real estate firms proved to be a game changer. Called the “three red lines” by state-run media, they placed stringent metrics for debt ratios and cash holdings. Many firms were unable to adhere to the new rules as their finances were already stretched.

6. How is the government trying to end the crisis? 

Avoiding a “Lehman moment” – when the failure of the US bank in 2008 sent shock waves through global markets – is a priority for the government. It’s unveiled measures centred on boosting equity, bond and loan financing for developers to alleviate the liquidity crunch.

They have been allowed to access more money from presales of homes, the industry’s biggest source of funds, and 200 billion yuan (S$37.3 billion) was allocated in special loans to complete stalled housing projects.

The government has tweaked financial rules to try to stabilise the situation, allowing the central bank to increase support for distressed developers and instructing banks to ensure growth in both residential mortgages and loans to developers in some areas. The government has pushed borrowing costs lower for homeowners by cutting a key mortgage reference rate.

7. Is it working? 

Not really. China’s residential property sector is still in a deep slump. Gross contracted sales for the top 100 developers in the first two months of 2024 were just 40 per cent of the average in the prior seven years and a quarter of the peak of 1.85 trillion yuan in 2021. Contracted sales in January and February for developers covered by Bloomberg Intelligence fell by 54 per cent on average from a year earlier, led by Country Garden’s 80 per cent slump. 

8. What does it all mean for prospective homebuyers? 

Across China, millions of square feet of unfinished apartments have been left to gather dust. Economists at Nomura International HK estimated in mid-July that Chinese developers had delivered only about 60 per cent of the homes they pre-sold from 2013 to 2020. (Buyer protections commonly used abroad, such as escrow accounts and instalment payments, have tended to be weak.)

In 2022 there were wildcat mortgage boycotts by owners of unfinished homes at over 300 housing projects in about 90 cities. With more than 70 per cent of urban China’s wealth stored in housing in some parts of the country, many livelihoods are at stake and the threat of popular unrest lingers. BLOOMBERG