Real estate propelled China's economic boom, but developers borrowed heavily as they turned cities into forests of apartment and office towers. That helped to push total corporate, government and household debt to the equivalent of more than 300% of annual economic output, unusually high for a middle-income country.
After years of warnings that led to global rating agencies cutting the Chinese government's credit rating in 2017, the ruling party cracked down on real estate debt in 2020. It imposed controls known as "three red lines" that prohibit heavily indebted developers from borrowing more to pay off bonds and bank loans as they matured.
A weak real estate industry complicates efforts by Chinese leader Xi Jinping's government to reverse a deepening economic slump after a rebound following the end of anti-virus controls fizzled out sooner than expected.
Economic trends
The economy grew by a robust 2.2% over the previous quarter in the January-March period. But that fell to just 0.8% in the three months ending in June. That is equal to a 3.2% annual rate, which would be among China's weakest in decades.
Revving up real estate spending was the ruling party's solution for previous downturns. Xi's government has eased restrictions on borrowing by developers and told banks to lend to homebuyers. But it appears to be trying to stick to its overall debt-reduction goal.
Real estate accounts for some 20% of China's economy. When spending on steel and copper for construction, furniture and other related purchases is added in, estimates of its share of the economy rise as high as 35%.
Real estate's troubles are causing a vicious cycle by prompting jittery households to put off housing, auto and other big purchases, which in turn depresses economic activity further. Auto sales shrank 2.6% in July from last year's already depressed level under anti-virus curbs.
Potential impact
Country Garden's debt struggle might "drive potential homebuyers away from privately owned developers," Moody's Investors Service said in a report. That would "weaken effects of any potential supportive measures by the government to stabilize property sales."
The industry also might be squeezed as investors and banks shy away from lending to smaller developers, Moody's said.
In a sign of weak demand, prices paid for new homes fell for a second month in July, according to the statistics bureau. Prices in 35 smaller cities declined 0.3% from June. Prices in 31 bigger cities edged down 0.2%.
Sales of land use rights are down, adding to the strain on local governments that are trying to manage debt burdens that swelled with the expense of fighting the COVID-19 pandemic.
Billions in losses
Country Garden was founded in 1992 by Yang Guoqiang, a former farmer and construction worker. Yang handed over his shares in 2005 to his 25-year-old daughter, Yang Huiyan. She was ranked the richest woman in Asia by Forbes magazine with a net worth of $11 billion.
Yang Huiyan's fortune rose to $33.1 billion in 2020, making her the 11th-richest private individual in China, according to Hurun Report, which follows the country's wealthy. Forbes estimated this week that plunged almost 90% to $4.3 billion as Country Garden's share price tumbled.
Country Garden's possible losses are a sliver of those of Evergrande, headquartered in Shenzhen, adjacent to Hong Kong, which reported in June that it lost $81 billion in 2021-22.
But both ran into the same problem: They have more assets than debt but can't turn slow-selling real estate into cash fast enough to repay lenders.
Country Garden reported 1.7 trillion yuan ($233 billion) versus 1.4 trillion yuan ($193 billion) of liabilities at the end of 2022. The business news magazine Caixin cited an unidentified source who said the developer might have an additional 200 billion yuan ($27 billion) in debt.
The developer had only 147.6 billion yuan ($20 billion) of cash. Some 60 billion yuan ($8 billion) was buyer deposits and other money that couldn't be freely used.
Country Garden, headquartered in Shunde, near Hong Kong, said Aug. 10 sales this year through July fell 35% from the same period of 2022 to 140.8 billion yuan ($19.3 billion). It said July sales fell 60%.
"The company has encountered the biggest difficulties since its establishment," its president, Mo Bin, said in a statement.
Country Garden had outstanding bonds and asset-backed securities of 104 billion yuan ($14.25 billion), including 78 billion yuan ($10.7 billion) of bonds sold abroad, according to Caixin. It said bonds worth 7.3 billion yuan ($1 billion) will mature in September.
The company also owes 162.5 billion yuan ($22.3 billion) to banks and other financial institutions, according to Moody's.
Evergrande, the global industry's most heavily indebted company, was big enough that regulators stepped in to supervise its debt restructuring, which has yet to be completed. But they avoided bailing out the company or its creditors to avoid sending the wrong message about the need to reduce debt.
