The Chinese developer Country Garden, which defaulted on its debts in 2023, announced that it had received a petition for liquidation from the creditor after non-payment of the loan.
The mentioned petition was filed by Ever Credit Limited. This firm provided the developer with a term loan, which amounted to $204.5 million. The relevant information is contained in the Country Garden’s stock exchange filing on Wednesday, February 28.
Against the background of the news about the petition for liquidation, the value of the developer’s shares showed a drop of more than 12%. Last month, rival company Evergrande was forced to decide on liquidation after a corresponding Hong Kong court landmark ruling. This firm was the second-largest developer in China during the best period in the history of its existence. The company’s foreign creditors were unable to reach an agreement on the restructuring of Evergrande’s huge debt, which became a kind of financial evidence that the brand had lost its former greatness. Negotiations on the relevant issue lasted 19 months, but the result of this long process turned out to be negative.
The collapse of Evergrande continues to be a debated issue. Currently, there is no definitive understanding of the impact of this event, the significance of which in the context of the current state of China’s economic system is difficult to underestimate, on investor sentiment. Also, the liquidation of a company can provoke sensitive processes in the labor market. In this case, a negative impulse is implied, the extent of which is still covered in mystery, which will become the obviousness as the future approaches. Moreover, the collapse of Evergrande may create a kind of shock effect on home buyers who are waiting for their apartments.
The share of the real estate sector in the structure of the Chinese economy is about 30%. This fact testifies to the evidence that the liquidation of one of the largest developers in an Asian country, even considering that it has lost some of its positions, can cause large-scale negative tendencies. In this case, the potential effect of the impact on the entire economic system is implied.
Last October, Alicia Garcia-Herrero, chief economist at Natixis for the Asia-Pacific region, said that the absorption of excess capacity in the real estate sector would slow down the growth of the Chinese economy. She believes the corresponding tendency will be maintained at least until 2026. Alicia Garcia-Herrero predicts that over the next two years, due to the crisis in the real estate sector, the growth rate of the Chinese economy will decrease by about 1.5% annually.
Country Garden announced its intention to strongly object to the liquidation petition, which was filed with the Hong Kong High Court on Tuesday, February 26. The developer said that the court hearing is scheduled for May 17.
Last October, a group of global banks and investors overseeing the credit default swap market reported that Country Garden had defaulted on its debt. The relevant decision was made after the company failed to repay the bonds by the deadline.
Country Garden, the largest housing construction firm in China during the best period of its existence history, missed the payment of $500 million in bonds. At that time, the company was struggling with a liquidity crisis. The developer warned investors about the likelihood of default on offshore debt. The company made this statement against the background of falling sales in the real estate sector.
Nicholas Chen, an analyst at CreditSights, says that creditors, by filing petitions, put pressure on developers who have defaulted so that these firms come up with meaningful restructuring plans or face liquidation threats. According to the expert, if Country Garden is liquidated, offshore creditors are unlikely to receive large amounts of money as a result of damages. In this context, Nicholas Chen drew attention to the structural subordination of offshore bondholders and the fact that most of the developer’s assets are onshore.
The Country Garden management warns that the Chinese real estate market will continue to be weak in 2024. The company has stepped up sales of its assets abroad. The developer strives through the implementation of these efforts to raise funds. Last month, the company sold its stake in the latest Australian project.
China’s economy has been negatively affected by the crisis in the real estate sector since 2021 when the dire straits in this area began against the background of government measures to limit the borrowing of developers in this area.
Last week, the People’s Bank of China cut its key mortgage reference rate by a record 25 basis points. This decision is part of the actions of the financial regulator aimed at improving the situation in the real estate sector. The crisis in the mentioned area turned out to be longer compared to the preliminary expectations. The current situation in the real estate sector has already provoked a decrease in investment volumes and a drop in sales. In China, dozens of developers have already defaulted on their debts.
Alicia Garcia-Herrero says that Beijing will have to adapt to the new reality. According to her, the relevant process has already begun, but it will last several years and will be painful. The expert noted that China should balance the supply in the real estate sector with a low level of consumer demand.
In January, the cost of new housing continued to fall in China. In some largest cities of the Asian country, stabilization of the dynamic of the mentioned indicator was recorded last month, but individual and scattered improvements did not change the overall negative trend.
