Hong Kong CNN –
Just a few months ago, Country Garden was the largest property developer in China, with more than 3,000 developments across the country.
Now, the company is struggling to survive in a troubled industry where many others are in the same boat.
On Wednesday, Country Garden reported a record loss of 51.5 billion yuan ($7 billion) in the first half of this year – and confirmed it is on the verge of defaulting on its huge debts.
“The company deeply regrets the unsatisfactory performance,” it said in a statement to the stock exchange.
It said it had been “caught up” by the depth and persistence of the downturn in China’s real estate market, particularly in smaller cities, and had failed to react quickly enough.
Real estate accounts for between a quarter and a third of China’s gross domestic product (GDP). What happens next could have huge consequences for the world’s second largest economy and its financial sector. Here’s what you need to know.
Ranked No. 1 by sales last year, Country Garden is one of the few leading private developers that is still standing after the liquidity crisis in the property sector two years back.
But the company has total liabilities of $194 billion, of which $15 billion is due within 12 months. It only has 101.11 billion yuan ($13.9 billion) in cash.
On Wednesday it tried to pay off a creditor by issuing new shares. But in its filing later that day, it confirmed it had missed interest payments to some bondholders earlier this month and that the group could default if the company’s financial performance “continues to deteriorate in the future”.
It added, “All of the above… indicate the existence of material uncertainties which may cast significant doubt on the group’s ability to continue as a going concern.”
The group has until the beginning of September to make up for the missing bond payments.
The fact that the once bulletproof-looking company is grappling with a cash crunch underlines how deep the asset slump has deepened. It also highlights the challenges facing Beijing in containing the problem.
Investors fear the default on loan payments by the company could further blow already weak investor confidence as Beijing looks to revive demand in the real estate market.
A default by Country Garden or another peer could spread to China’s wider economy and even spread to global markets. Earlier this month, fears of a financial crisis flared up after Zhongrong Trust, one of the country’s largest private trust companies, defaulted on payments to its investors for several of its investment products.
Country Garden is not alone in crisis.
China Vanke, the country’s third largest residential developer last year, on Thursday reported a 19% decline in net profit for the first six months of this year.
The Shenzhen-based developer also canceled plans to raise up to $2.1 billion by issuing new shares, saying that the value of its stock was at a “low level” and therefore the sale would harm existing investors.
CEO Zhu Jiusheng said during an earnings call that the company faced “pressure in short-term profitability”.
“The entire industry has undergone profound changes and its gross profit margin continues to decline,” he added. “The previous method of buying large amounts of land with high leverage … has become unsustainable.”
Vanke’s shares have fallen 25% this year to their lowest level since last October.
Its chairman Yu Liang said all players in Chinese real estate were under “unprecedented pressure”.
“We can’t see the future clearly and it’s not going to be easy for everyone,” he said during the call.
Beijing has announced several stimulus measures in recent days to boost the real estate sector, including easing mortgage restrictions for home buyers. Yu said this could have a calming effect on anxious markets.
“The existing policies are already working and we hope that the measures that have been announced can be implemented at the earliest,” he added. “We look forward to more.”
What happened to Evergrande?
The Chinese asset crisis came to a head in 2021, when Evergrande defaulted on its debt. This week’s news from Country Garden and Vanke suggests crisis Maybe it hasn’t come down yet.
According to data released by the National Bureau of Statistics earlier this month, property investment declined by 8.5% in the first seven months of this year.
by selling a new home Sales at the country’s 100 largest developers plunged 33% from a year earlier in July, the sharpest drop in 12 months, according to data from China Real Estate Information.
For years, many developers borrowed heavily to build and sell properties. He took huge loans, which many defaulted in paying.
Evergrande is still trying to dig itself out of that deep hole.
Earlier this month, it filed for bankruptcy protection in the United States, a move that is part of an effort to restructure its large debts.
On Sunday, Evergrande reported a significant contraction It narrowed its net loss in the first half of the year due to an increase in revenue. But still he lost $ 4.5 billion.
The company’s ability to continue as a going concern still depends on whether it can successfully complete an offshore debt restructuring plan.
Apart from Evergrande, Chinese developers who have defaulted so far include Kaisa Group, Shimao Group and Times China.