China’s largest home builder is struggling to survive as the economic crisis deepens

When Country Garden, the largest developer in China’s increasingly turbulent real estate sector, published its annual report in April, it was a surprise. Cover design Resurgent Hope: The phoenix spreads its wings.

The company said the image showed that the Chinese economy was “back on track” and that this year would see “growth rise to new heights.”

That was wishful thinking.

Shortly after the report was released, China’s nascent economic recovery lost steam and the already sluggish real estate market began to collapse. At Country Garden, unfinished apartment sales, a critical indicator of future revenues, fell more than 50 percent in June and July, double the rate of decline in the previous five months.

Over the past three years, as dozens of major real estate developers defaulted after years of excessive borrowing, Country Garden has been an anomaly. But last month, it defaulted on interest payments — suggesting it was also at risk of financial collapse, with $187 billion in debt.

Country Garden should receive $22.5 million this week, the end of a grace period for missed payments. On Friday, the company received last-minute approval from creditors to defer repayment of $537 million of yuan-denominated bonds, originally scheduled for Monday, until 2026, according to documents shared by Country Garden.

Last week, after reporting a $7.1 billion loss for the first six months of 2023, Country Garden said there were “material uncertainties that may cast significant doubt” on its ability to avoid bankruptcy. The company is scrambling to raise cash and alienate its creditors, selling stakes in real estate and issuing shares at a discount.

It was a dramatic downfall for Country Garden. The company’s improbable rise from regional homebuilder to nationwide giant has echoed China’s meteoric rise. Now its collapse reflects the speed and severity of the country’s real estate collapse, which threatens to derail the broader economy.

“As huge as Country Garden is, it’s kind of like a canary in a coal mine,” said Kenneth Rogoff, an economics professor at Harvard University who has written extensively about China.

In order to support the faltering real estate market, China’s financial regulators on Thursday rolled out a series of measures, including lowering minimum down payments for first-time buyers and lowering interest rates on existing mortgage loans.

These and other measures may not be enough to save Country Garden, which is struggling to pay its debts.

Many Country Garden bonds are trading for pennies on the dollar, suggesting lenders have low hopes of getting repaid. The company’s share price is now below one Hong Kong dollar, a sharp decline for what was once one of China’s largest private companies, whose shares traded at more than HK$17 five years ago.

Country Garden was founded by Yang Guoqiang, a former farmer and construction worker who grew up in poverty so extreme that, according to a profile on a government website, he didn’t wear shoes for the first 17 years of his life and nearly fell. Out of school because he can’t afford the $1 tuition fee.

The company began developing real estate in 1997, at a time when China was beginning to change the rules for private ownership of real estate. When it went public in 2007, the company told investors that one of its strengths was a large reserve of low-cost land for development. It also said it could build faster and cheaper than competitors.

Two years before the IPO, Mr. Yang transferred his 70% stake to his second daughter, Yang Huiyan, who was then a director in the company’s purchasing department. When Country Garden’s shares listed, the 25-year-old. Yang became the richest woman in Asia, with her fortune eventually estimated at up to $29 billion. Ms. Yang, who was co-chairman with her father until last March, when she took over the role exclusively, remains Country Garden’s majority shareholder.

Country Garden expanded rapidly, keeping pace with the government’s urbanization drive. It has branched out beyond Guangdong province and pushed aggressively into China’s less developed third- and fourth-tier cities, capitalizing on the post-2015 boom when China, as part of a national plan to “redevelop shantytowns,” began paying residents cash in exchange for trade. . …in rickety shacks in small towns and cities.

The company succeeded through a high turnover strategy: build fast, sell fast and cash out fast. This allowed Country Garden to sell homes cheaper while still making greater profits than competitors. As real estate became the backbone of the Chinese economy and the main investment for many Chinese families, Country Garden emerged as one of the largest companies in the country that was not state-owned.

Country Garden has sold more homes than any other developer over the past six years, attracting buyers like Zhou Qizhou.

In 2019, he bought an apartment in Country Garden in Enshi, a smaller city in central China. Although mr. Zhu was working in Shanghai, and felt pressured to buy a house in case he couldn’t afford it later. He bought a 115-square-meter (about 1,200 square feet) apartment for about $125,000, and was impressed by the speed of construction and the low price, although he described the construction quality as average. He only regrets that he bought right before the market went down.

“At the end of the day, Country Garden is still a big brand,” he added. Zhou said.

But demand for real estate, once insatiable, has evaporated and the Chinese economy is floundering. Companies like Country Garden have been pressured by the effects of crippling coronavirus lockdowns, a government crackdown on reckless borrowing by property developers, and years of prioritizing state-owned companies over private companies. The economic downturn was more severe in smaller cities, where local economies could not keep up with the building boom. Now those cities are full of empty apartments.

When Country Garden recently revealed its huge loss in the first half of the year, it said it “failed to understand the potential risks associated with its disproportionately large investments” in smaller cities.

Until recently, Country Garden was hailed as a survivor of the industry’s turmoil. While Beijing has done little to support other major homebuilders, including Evergrande, the now-bankrupt property developer that once rivaled Country Garden for market supremacy, the government has shown a greater willingness to support the company.

When China’s financial regulators issued a 16-point guide in November to help the property industry, Country Garden was placed on a “white list” of quality developers to prioritize for financial aid and lines of credit from state-owned banks. According to Chinese media reports.

For many years, Country Garden maintained close ties with the ruling Communist Party. Mr. Yang, its founder, worked for the Chinese People’s Political Consultative Conference, a national political advisory body. Country Garden has proactively supported policy initiatives such as distribution of sewing machines and agricultural equipment in poor areas under the slogan “Poverty Alleviation”.

Even as Country Garden’s finances deteriorated, it prioritized the wishes of political decision-makers by completing construction of pre-sold homes. It completed nearly 700,000 pre-sold units last year and another 278,000 units in the first half of this year.

However, in its latest earnings report, Country Garden said it was focusing on improving its cash flows and cutting costs. It now employs about 58,000 people, less than half the number of full-time employees in 2018. The company declined to provide additional comment beyond its general announcements.

In the earnings report, the company said it was “deeply remorseful” about its current predicament, but added that it would “never succumb to passive defeatism.” when mr. Yang addressed employees at a company meeting earlier this year, urging them to persevere.

He said: “Do not fall before dawn.” According to the company’s WeChat account. “We must live until spring comes, and spring will certainly come.”