China's Largest Developer, Country Garden, Faces Debt Crisis: Implications for Economy

In a concerning development for China's real estate sector, Country Garden, the country's largest developer by sales volume, is facing a debt crisis that could have wider implications for the economy. Construction has come to a halt at two of Country Garden's residential complexes in Tianjin, with workers reporting months without pay. The company, once considered financially sound, now struggles with financial woes that are indicative of the broader challenges faced by developers in China's slowing housing market. Country Garden's ongoing financial troubles have added to the already precarious state of China's real estate sector, which accounts for a significant portion of the country's economy.

With construction partially or fully stopped at the two Tianjin sites, workers are under immense pressure and struggling to support their families. The situation is becoming increasingly dire, with one worker expressing concern about the upcoming school year and caring for elderly parents. The Yunhe Shangyuan site, one of the projects affected by the construction halt, claims that registered employees are still being paid. However, many workers are not directly employed by the developer but rather by its contractor, Shenyang Tengyue Construction. The contractor, unfortunately, has not responded to requests for comment, leaving workers unsure when they will receive their wages. Country Garden is facing the challenge of completing nearly 1 million homes, according to estimates.

The company has not publicly acknowledged any halted projects due to financial constraints but, in an exchange filing, pledged to ensure the delivery of apartments and fulfill its commitment to homebuyers. However, halted construction and slowing development progress are not uncommon in China, as developers adjust their construction schedules based on sales rates. With sales declining, construction slows down, further exacerbating the challenges faced by the industry. Last year, China's real estate market suffered a setback as developers faced liquidity issues and COVID-19 restrictions.

While there was a slight rebound in the first quarter of 2023, transaction volumes have since declined, leaving many city housing markets in a depressed state. The confidence in the sector has been shaken, and concerns about defaults and collapses loom large. Fitch, a leading ratings agency, recently downgraded the credit rating of Country Garden subsidiary Country Garden Services to junk status. The downgrade reflects heightened liquidity pressure at the developer, which has amassed over $150 billion in debt.

Country Garden Services is responsible for property management and now faces negative prospects for growth, brand reputation, profitability, and funding access. To address the industry's indebtedness, Chinese authorities have implemented stricter credit conditions and dried up sources of financing since 2020. This has led to a wave of defaults among developers, including Country Garden's rival Evergrande, which had substantial debt and limited cash reserves. Beijing has attempted to support the property sector through measures such as cutting mortgage rates and offering more loans to developers.

However, these efforts have had limited impact, and experts argue that more needs to be done to stabilize the sector and prevent further economic impacts. As Country Garden grapples with its debt crisis and halted construction projects, the consequences for both the company and the wider Chinese economy remain uncertain. The situation highlights the challenges faced by developers in an increasingly tumultuous real estate market and the need for government intervention to mitigate the risks.