China’s Biggest Homebuilder Fights to Survive as Economic Crisis Deepens

When Country Garden, the biggest developer in China’s increasingly troubled real estate sector, published its annual report in April, the cover design exuded hope: a phoenix spreading its wings.

The company said the image showed that China’s economy was “back on track” and that this year would see “growth soaring to new heights.”

That was wishful thinking.

Shortly after the report’s release, China’s nascent economic recovery lost steam and an already sluggish real estate market started to collapse. At Country Garden, presales of unfinished apartments, a crucial indicator of future revenue, plunged more than 50 percent in June and July, twice the rate of decline in the preceding five months.

For the past three years, as dozens of major property developers defaulted after years of excessive borrowing, Country Garden was an outlier. But last month, it missed two interest payments — signaling that it, too, was at risk of financial collapse, with $187 billion in debt.

Country Garden must come up with $22.5 million this week, the end of a grace period for the missed payments. On Friday, the company won a last-minute approval from creditors to postpone repayment of $537 million in yuan-denominated bonds, originally due on Monday, until 2026, according to documents shared by Country Garden.

Last week, after reporting a $7.1 billion loss for the first six months of 2023, Country Garden said there were “material uncertainties which may cast significant doubt” on its ability to avoid bankruptcy. The company is scrambling to raise cash and keep its creditors at bay, selling off stakes in properties and issuing shares at a discount.

It has been a dramatic fall for Country Garden. The company’s improbable rise, from a regional homebuilder to a nationwide behemoth, tracked China’s own meteoric ascent. Now, its collapse reflects the speed and severity of the country’s real estate meltdown, which threatens to derail the broader economy.

“As giant as Country Garden is, it’s a canary in the coal mine,” said Kenneth Rogoff, a Harvard University economics professor, who has written extensively about China.

To bolster the teetering real estate market, China’s financial regulators on Thursday rolled out a series of measures, including lower minimum down payments for first-time buyers and a reduction in interest rates on existing mortgages.

These and previous measures may not be enough to save Country Garden, which is struggling to pay its debts.

Many Country Garden bonds trade for pennies on the dollar, suggesting that lenders have low hopes of getting repaid. And the company’s share price is now below 1 Hong Kong dollar, a precipitous fall for what was once one of China’s largest private companies, whose stock traded above 17 Hong Kong dollars five years ago.

Country Garden was founded by Yang Guoqiang, a former farmer and construction worker who was raised in such dire poverty that, according to a profile on a government website, he didn’t wear shoes for the first 17 years of his life and he almost dropped out of school because he couldn’t afford the $1 tuition.

The company started developing properties in 1997, around the time that China began to change the rules for private ownership of real estate. When it went public in 2007, the company told investors that one of its strengths was a large reserve of low-cost land to develop. It also said it could build faster and cheaper than competitors.

Two years before the public offering, Mr. Yang transferred his 70 percent stake to his second daughter, Yang Huiyan, who was then a manager in the company’s procurement department. When Country Garden’s stock listed, the 25-year-old Ms. Yang became the richest woman in Asia, with a fortune eventually estimated as high as $29 billion. Ms. Yang, who was co-chair with her father until this March, when she assumed the position exclusively, remains Country Garden’s majority shareholder.

Country Garden expanded rapidly, moving in lock step with the government’s urbanization push. It branched out beyond its home province of Guangdong and pushed aggressively into China’s lesser developed third- and fourth-tier cities, benefiting from a boom after 2015 when China, as part of a national “shantytown redevelopment” plan, started paying residents cash to trade in dilapidated shacks in smaller cities and towns.

The company succeeded with a high turnover strategy: build fast, sell fast and cash out fast. This allowed Country Garden to sell cheaper homes while still reaping larger profits than rivals. As real estate became the backbone of China’s economy and the main investment for many Chinese households, Country Garden emerged as one of the country’s largest companies that wasn’t state-owned.

Country Garden has sold more homes than any developer over the past six years, by appealing to buyers like Zhou Qizhou.

In 2019, he bought a Country Garden apartment in Enshi, a smaller city in central China. Although Mr. Zhou was working in Shanghai, he felt pressure to buy a home in case he couldn’t afford one later. He purchased a 115-square-meter (about 1,200 square feet) apartment for around $125,000, impressed by the construction speed and low price, even though he described the construction quality as so-so. He only regrets that he bought right before the market softened.

“At the end of the day, Country Garden is still a big brand,” Mr. Zhou said.

But the once-insatiable demand for real estate has evaporated and China’s economy is floundering. Companies like Country Garden have been strained by the effects of the crippling Covid lockdowns, a government crackdown on reckless borrowing by property developers and years of prioritizing state-owned businesses over private enterprises. The economic downturn has been more severe in smaller cities, where the local economies did not kept pace with the building boom. Now those cities are awash in empty apartments.

When Country Garden recently revealed its enormous first-half loss, it said it had “failed to grasp the potential risks associated with its disproportionately large investment” in smaller cities.

Until recently, Country Garden had been hailed as a survivor of the industry turmoil. While Beijing did little to backstop other major home builders, including Evergrande, the now bankrupt property developer that once rivaled Country Garden for market supremacy, the government has displayed a greater willingness to support the firm.

When China’s financial regulators issued a 16-point guide in November to aid the property industry, Country Garden was placed on a “white list” of quality developers to prioritize for financial aid and credit lines from state-owned banks, according to Chinese media reports.

For years, Country Garden has maintained close ties with the ruling Communist Party. Mr. Yang, its founder, served on the Chinese People’s Political Consultative Conference, a national political advisory body. Country Garden proactively supported policy initiatives like the distribution of sewing machines and farm equipment in poor areas under the banner of “poverty alleviation.”

Even as Country Garden’s finances have deteriorated, it has prioritized the wishes of policymakers by completing the construction of presold homes. It finished nearly 700,000 presold units last year and another 278,000 units in the first half of this year.

Even so, in its latest earnings report Country Garden said it was focusing on improving its cash flow and cutting costs. It now employs about 58,000 people, fewer than half the full-time staff it had in 2018. The company declined to provide additional comment beyond its public announcements.

In the earnings report, the company said it was “deeply remorseful” about its current predicament, but added that it “will never succumb to passive defeatism.” When Mr. Yang addressed employees at a company meeting early this year, he urged perseverance.

“Do not fall down before dawn,” he said, according to the company’s WeChat account. “We must live till spring comes, and spring will surely come.”