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China: Next real estate giant on the ropes

August 17, 2023

China's largest property developer, Country Garden, is struggling to stay afloat. A possible bankruptcy could spell more trouble for home prices and the wider economy.

Construction workers at a site being built by Country Garden, China's largest real estate developer, in Beijing, China, on August 15, 2023
Country Garden has promised 'five-star living' for the massesImage: Ichiro Ohara/Yomiuri Shimbun/AP/picture alliance

Chinese policymakers are facing calls to do more to prop up the ailing real estate market after the largest property developer, Country Garden, warned of multibillion-dollar losses and missed bond payments.

The world's 138th largest company, according to business magazine Fortune, said last week that due to a "decline in sales in the real estate industry," it was on course to lose between $6 billion and $7 billion (€5.5 billion and €6.4 billion) in the six months from January to June 2023.

Until recently, Country Garden appeared to have been spared from the real estate downturn that took hold in China during the pandemic when the government of  President Xi Jinping placed limits on how much debt property developers could take on.

Over the previous two decades, as the Chinese population grew more wealthy, an unprecedented construction boom led to a quadrupling in real estate prices. Hundreds of millions of people bet that property speculation would be safer for their savings than the country's volatile stock markets.

A Country Garden developed high-rise residential buildings seen in Fuyang. Anhui province, China
Country Garden sold nearly two-thirds of its properties last year in smaller Chinese citiesImage: Sheldon Cooper/SOPA Images/ZUMA/picture alliance

First Evergrande, now Country Garden

But after years of high growth, the government's new debt curbs caused property sales and prices to plummet, hitting one developer, China Evergrande, particularly hard.

The country's second-largest construction firm, Evergrande had grown used to using investor deposits on future projects to fund current construction. In 2021, Evergrande announced it owed $300 billion and later defaulted on some of its debt, along with many of its peers.

"When the China Evergrande crisis unfolded, people feared that others would follow, but certainly not Country Garden. It was much less leveraged than Evergrande," Alicia Garcia-Herrero, chief economist for Asia Pacific at the French investment bank Natixis, told DW.

"Without a continual increase in prices, the whole real estate model is unsustainable and even a company like Country Garden can't make it," added Garcia-Herrero, who is based in Hong Kong.

Rumors about Country Garden's troubles have been growing for months. Its shares have fallen by more than 75% since January. On Wednesday, Country Garden's stock was trading at 0.83 Hong Kong dollars (€0.093/$0.10).

Major trust firm misses payments

Adding insult to injury, a major firm in China's $2.9 trillion trust sector, Zhongrong International Trust, admitted this week it had missed dozens of payments on investment products, making a government intervention more likely.

Trust companies are a vital part of China's shadow banking system as they pool household savings to invest in real estate, stocks and commodities. They tend to have an outsize exposure to the country's property sector.

Having already offered some support to developers and incentives for first-time home buyers and upgraders, China's leaders are "very likely" to bail out Country Garden, Pushan Dutt, an economics professor at INSEAD business school in Singapore, told DW.

"China has struggled with the problem of imbalanced growth driven by investments with real estate taking the lead for more than a decade," Dutt said. "Every time they try to address this issue, growth slows down, and they go back to the same solution of bailouts, pushing liquidity, and cutting interest rates."

Bankruptcy would have knock-on effect

As China's real estate sector contributes as much as 30% of the country's gross domestic product (GDP), any collapse of Country Garden would have a damaging impact on the entire financial system.

Chinese job seekers read information for employments at a job fair in Xiamen city, southeast China's Fujian province
Youth unemployment is on the rise in China after the collapse of the property market, driving down economic growthImage: Xiang Yang/picture-alliance/dpa

China's post-COVID recovery is already much weaker than expected thanks to falling global demand for Chinese exports and a lack of domestic demand. The rebound has been so feeble, several economists last month downgraded GDP forecasts for the year to 5% from 5.5%. Beijing said this week it would stop publishing youth unemployment figures as they're so high.

INSEAD professor Dutt warned of the risk of contagion from not propping up the property market, noting China could face the same "years of anemic growth" that Japan faced in the early 1990s. He was referring to Japan's so-called lost decade following a property bubble that saw the average Tokyo home reach 15 times the average annual salary until it burst.

"Arresting the adverse spillovers from property will require significantly larger fiscal stimulus than the authorities have so far entertained," Gerwin Bell, PGIM fixed income's lead economist for Asia, told news agency Reuters this week. "We expect the Chinese authorities to soon come to the same conclusion." 

Others, however, are less convinced of direct intervention, including Maggie Hu, assistant professor of real estate and finance at the Chinese University of Hong Kong, who told DW the odds of a Country Garden bailout were "quite low."

"If it became urgent, policies will be implemented to safeguard the construction of pre-sold properties, ensuring the welfare of homebuyers and the banks involved," said Hu.

Chinese ready for lasting property crash

No matter whether and how policymakers intervene, most economists expect the real estate downturn to persist, especially outside of the megacities of Beijing and Shanghai.

 Average new home prices in the 35 smallest cities surveyed by the National Bureau of Statistics fell for the 17th straight month in June on a year-on-year basis. 

China property market crisis stirs unrest (August 2022)

"The detrimental effects [of the crash] will be particularly pronounced in second or third-tier cities," Hu predicted. "Especially those cities experiencing a declining economy with an aging population and an outflow of population."

Beijing is keen to avoid a glut of unfinished homes, particularly in smaller cities, where Country Garden has been most active in construction and has an estimated 1 million outstanding homes.

While the firm promised the masses the chance to achieve "five-star living," many are about to watch as their dreams go up in smoke.

Edited by: Uwe Hessler