The troubles of property developer Country Garden, which has long had a reputation for great financial strength and is now heavily in debt, raises fears of a bankruptcy of consequences immeasurable for the financial system in China, two years after the fall of its competitor Evergrande.
These are the reasons why Country Garden’s financial situation is watched with anxiety by the markets:
How important is Country Garden?
Country Garden was China’s largest private developer in sales last year.
The group is dominant in small cities, which account for around 60% of its projects. The problem is that this is where real estate prices have fallen the most and where most of their clients have very limited purchasing power.
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Country Garden registered more than 3,000 construction works in progress at the end of 2022, of which about 30 abroad, especially Australia, Indonesia and the United States.
Any stoppage in work is a factor of social instability in China, as owners generally pay for a good before construction begins.
Country Garden has four times more projects than its competition Evergrande, a company that when it stopped its construction caused demonstrations and suspension of payments last year.
What is the situation?
Country Garden had a colossal debt at the end of 2022 estimated by the group at about 1.15 trillion yuan (165 billion dollars).
The Bloomberg agency considers it even higher and calculates it at 1.4 trillion yuan (192,000 million dollars).
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The promoter had in this period a treasury of 20,300 million dollars.
Country Garden was, however, unable to pay two loan interest repayments last week. And it risks falling into default when there are pending commitments for September.
And to aggravate the pressure, it faces maturities of 4.3 billion dollars in 2024, underlines the Moody’s rating agency.
By way of comparison, the top real estate company in distress, Evergrande, had estimated debt at the end of 2022 of about $340 billion and had $2 billion of liquidity.
What consequences?
The problems of both real estate giants make a sector that is already affected by the health crisis and the economic slowdown in China a little more fragile.
This situation creates mistrust among potential buyers, further aggravating the financial situation of developers, including public groups.
Sino-Ocean, which is supposed to have the best access to financing, announced on Monday that it was unable to pay the interest on a loan and expects record half-year losses this month.
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“The sector’s debt problems will increase if the Chinese economy deteriorates and developers find it difficult to generate revenue,” warn analysts at SinoInsider, a US-based Chinese economics bureau.
Sign of market jitters: House prices fell in July at their fastest pace in a year, according to official figures released Wednesday.
What risks for the financial system?
During the best years, many developers turned to trust or asset management companies to finance their projects.
The tentacular Zhongzhi conglomerate and its galaxy of financial firms is one of the biggest players in the market, generating 1 trillion yuan ($138 billion) of assets.
A large number of companies and wealthy individuals entrusted their savings to him.
But the group has been caught in the crisis and is unable to repay creditors, causing “considerable losses” for investors, says analyst Ting Lu of Nomura bank.
Zhongzhi owns the subsidiary Zhongrong International Trust (ZTR), where concerned savers in China tried Wednesday to reclaim accounts, according to Bloomberg.
A default by the Zhongzhi conglomerate “may reveal the immense hidden risks of the Chinese financial system,” warns SinoInsider.
It’s just “the visible part of the iceberg.”
AFP
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