10-10-2023 (BEIJING) On Tuesday, heavily indebted Chinese property behemoth, Country Garden, revealed its concerns about the possibility of failing to meet all of its offshore payment obligations within the stipulated timeframes, a worrisome development that brings the company closer to a potential default.
By the end of 2022, Country Garden, one of China’s largest property developers, had accumulated a staggering debt estimated at 1.43 trillion yuan (approximately US$196 billion).
The company’s deteriorating cash flow situation has raised alarm bells, as there is a looming fear that it might collapse, resulting in severe repercussions for China’s already fragile economy, which is grappling with record-high youth unemployment, declining consumer spending, and a broader crisis within the real estate sector.
Country Garden, which had officially entered the danger zone of potential default in September, narrowly managed to repay $22.5 million in interest on loans during a 30-day grace period last month. Subsequently, it negotiated with creditors to reschedule several repayment deadlines, while several more are set to approach in the coming weeks.
In a filing with the Hong Kong Stock Exchange on Tuesday, the company announced that it had missed a payment of HK$470 million (equivalent to $60 million). It currently has a 30-day grace period to prevent a potential default.
However, in the same announcement, Country Garden conveyed its expectation that it might not be able to meet all of its offshore payment obligations within the prescribed timelines or during the relevant grace periods. Consequently, it cautioned that such non-payment could prompt creditors to demand the acceleration of debt repayment or initiate enforcement actions against the company.
Country Garden pledged to devise a “holistic solution in a fair and equitable manner” for settling its debt obligations. It has also enlisted financial advisors to evaluate the capital structure and liquidity of its subsidiaries.
The company expressed its intention to engage in continued cooperation and dialogue with all creditors to reach a viable solution as promptly as possible. It also appealed for the patience of creditors as it assesses the current challenges.
A Growing Crisis in the Real Estate Sector:
The financial pressures on many leading Chinese property developers have escalated recently due to their massive debt burdens, amplifying concerns of bankruptcy in an industry already grappling with the effects of the COVID-19 pandemic and a broader economic slowdown in China.
In the past month, Moody’s downgraded Country Garden’s credit rating, indicating that its obligations are “highly speculative” and at significant risk of default.
Notably, Country Garden boasts four times the number of projects as its counterpart Evergrande, which defaulted in 2021, leading to protests and monthly payment strikes last year when construction sites were shut down.
The cessation of construction projects poses the risk of social instability in China, where property buyers often make payments before construction commences.
Therefore, if Country Garden were to collapse, similar to Evergrande, which holds debt exceeding $300 billion, it would likely have catastrophic implications for China’s financial system and the broader economy.
