China’s Largest Private Developer Country Garden Warns of Default

Country Garden, the largest private developer in China, has warned of potential non-payment of international debts, which would represent a significant blow to the struggling real estate sector in the country. The company has approximately $200 billion in liabilities and nearly $10 billion in dollar-denominated debt, and in a recent statement to the Hong Kong Stock Exchange, it said it missed a payment of $60 million on some of its debts and expects that it ‘will not be able to meet its payment obligations abroad,’ reported the Financial Times.

– Such non-payment could lead relevant creditors of the group to demand acceleration of payment of the relevant debt owed to them or to take enforcement actions – the company said on Tuesday.

The statement highlights the sudden deterioration of Country Garden’s financial condition, which had weathered the cash crisis in the real estate sector until this year following the default of its competitor Evergrande in 2021. Potential non-payment also raises concerns about the Chinese real estate sector, which typically drives more than a quarter of economic activity in the country but has been in trouble for two years due to construction delays and non-payments.

Country Garden reported that its sales in the first nine months fell by 44 percent compared to the same period in 2022 and that it declined in September for the sixth consecutive month.

– As there has been no material improvement in real estate sales across the industry, the group faces significant uncertainty regarding asset disposal, and its liquidity position is expected to remain very difficult in the short to medium term – the group said.

Country Garden did not pay international bonds in August, triggering a 30-day grace period during which it narrowly avoided default last month. On Tuesday, it was said that it is expected not to make payments ‘within the relevant grace periods,’ one of which expires next week, FT reports.

Huge Losses

The fate of Country Garden, which was previously considered somewhat healthier than other private developers and acceptable for state support programs, will put pressure on Chinese policymakers who initially sought to limit the influence of developers in 2020. Beijing has increased its support for the real estate sector and lowered rates in recent months, while some cities have also eased policies designed to limit price growth, but this may not be enough.

The restructuring plan of Evergrande, the world’s most indebted developer that first defaulted on its international debts two years ago, was canceled at the end of September after the company cited an indefinite ‘investigation’ and pointed to regulatory restrictions on issuing new notes.

Advisors to international bondholders holding about $6 billion in the company on Monday lashed out at the developer, saying they were ‘left in the dark’ after the abrupt cancellation of the plan. The group of bondholders stated that the current ‘base case’ is that the company will be liquidated at a hearing in Hong Kong at the end of the month.

Sunac, another former major private developer in China, received approval for its own $10 billion restructuring plan from a Hong Kong court this month. The problems of Country Garden have also heightened fears that the crisis will spill over into other sectors.

During the summer, Zhongrong, a giant in the Chinese financial industry with $3 trillion in capital that lent money to developers, did not pay clients. In a separate statement to FT, Country Garden said it hopes to ‘comprehensively resolve the current risks of the company’s debt abroad.’ In September, it reported $7 billion in losses for the first half of the year.