In a recent filing with the Hong Kong Stock Exchange, Country Garden admitted to failing to recognize and respond to the risks associated with the ongoing real estate slump, particularly in smaller cities where most of its developments are located. The company expressed deep remorse for its unsatisfactory performance and acknowledged that it is facing its most severe difficulty ever. Country Garden, founded in 1992 by a former farmer who later handed over the company to his daughter Yang Huiyan, one of Asia's wealthiest women, has been edging towards default for several months. It currently has debts exceeding $200 billion and recently missed interest payments on two loans, putting it at risk of default.
Country Garden is now in negotiations with its creditors to avoid default. However, if it does default, it would be the largest default since the collapse of Chinese property giant Evergrande in 2021. This poses a significant risk for Chinese leaders as they struggle to restore confidence in the country's economic miracle. The housing crisis further undermines the government's target of 5 percent economic growth this year, especially as consumer spending was expected to drive the recovery after three years of zero-COVID policies. With households delaying major purchases such as homes, China's economy is already grappling with rising youth unemployment, slowing manufacturing, and depressed spending due to extreme weather events.
While a Country Garden default is not expected to be as severe as Evergrande's collapse, analysts believe it will still have detrimental effects on China's economy. This includes ripple effects on new construction, purchases of building materials, consumer spending, and the banking sector. As a significant portion of Chinese households' assets are tied to real estate, stagnant or declining home prices result in reduced disposable income for individuals. However, the risk of global contagion is relatively low, with the main implication being that China may reduce its imports from the world.
Chinese authorities implemented restrictions known as the "three red lines" in 2020 to limit developers' debt levels. Despite the ongoing housing slowdown, the government has refrained from bailing out companies or implementing stimulus measures to prop up the market, as it has done in previous downturns.
The Chinese government has been implementing various measures to boost the country's property market, including encouraging banks to lend more to home buyers, easing mortgage rules, and extending tax rebates. However, these efforts have not been successful in preventing the collapse of home prices, particularly in smaller cities.
According to Ng, the results of Country's Garden indicate that many developers in China are still facing challenges, and it may be difficult for other private sector developers to expand in the future.
The struggling property market in China has raised concerns about the health of the country's economy, as the real estate sector plays a significant role in driving economic growth. If the property market continues to decline, it could have a negative impact on the overall economy.
In conclusion, the financial results of Country's Garden highlight the ongoing struggles faced by developers in China's property market. Despite efforts by the government to stimulate the market, home prices continue to collapse, especially in smaller cities. This situation raises concerns about the future expansion of private sector developers and the overall health of China's economy.
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