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  • Writer's pictureJoel Lewitt

Country Garden acknowledges inability to meet debt payment deadlines

Country Garden, a prominent Chinese property developer, issued a warning on Tuesday, revealing its inability to meet a 470 million Hong Kong dollar ($60 million) loan repayment on time. This development underscores the growing turmoil within the real estate industry following Beijing's stringent measures to curb escalating debts.

In a filing to the Hong Kong Stock Exchange, the company expressed its anticipation of failing to fulfill offshore payment obligations promptly, including outstanding U.S. dollar notes. Country Garden cited immense pressure on its sales as the primary reason for this financial predicament. Remarkably, Country Garden had previously enjoyed a reputation as a model real estate company, having managed to avoid debt defaults, unlike rivals such as China Evergrande, the world's most debt-burdened property firm.

Evergrande faced a default crisis in 2021, which ensued after the Chinese government initiated restrictions on developer borrowing. In response to Country Garden's announcement, its Hong Kong-traded shares witnessed a significant drop of 10.7% on Tuesday.

This liquidity crisis signifies that property developers continue to grapple with financial challenges, even as regulators relaxed some housing purchase controls to alleviate industry difficulties.

The ongoing concerns are that these problems within the real estate sector could potentially disrupt financial markets and extend their impact into the broader economy. However, the crisis has been unfolding gradually, with Hong Kong's Hang Seng index showing a 0.8% gain on Tuesday, while Evergrande's shares declined by 3.6%.

Country Garden recently secured loans from various banks, including a $50 million loan from China Minsheng Banking Corporation earlier this year and a separate $280 million loan from the Hong Kong branch of the Industrial & Commercial Bank of China in December 2022.

Country Garden disclosed a nearly 44% drop in sales from January to September compared to the same period the previous year, emphasizing that without an industry-wide improvement in property sales, its liquidity position would remain highly strained in the short to medium term. Nonetheless, the company continues to complete and deliver residential housing, having reported the delivery of 420,000 apartments in January-September and 700,000 in 2022.

In the preceding month, Country Garden managed to make interest payments on two securities within a 30-day grace period. As of June, the company was burdened with over $180 billion in liabilities, while Evergrande's debts exceeded $300 billion.

In a related context, a former Chinese official recently estimated that even the country's vast population of 1.4 billion would struggle to occupy all the vacant homes nationwide.

Nevertheless, housing construction remains a critical driver of the economy, fueling demand for materials, appliances, and various products. Furthermore, land sales for development purposes serve as a vital source of revenue for local governments.

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