Country Garden: survivor of the China property bloodbath

On the north-west edge of Shanghai, over one hundred salespeople in black suits gathered around a replica of a Country Garden residential development as an enthusiastic instructor offered guidance on how to sell apartments.

Behind the glistening showroom for Project Exquisite, workers and cement trucks moved in and out of a vast construction site where the scaffolded towers were close to completion.

The scene evoked the glory days of China’s multi-decade real estate boom, but the sector is in crisis. Country Garden, the country’s biggest developer by sales, has emerged as one of the most prominent survivors in an industry plagued by construction delays, defaults and falling sales for more than a year.

New policy support from Beijing has raised investor hopes that the worst is over. The government this week said it was ready to deploy over $162bn of credit from state banks to developers in what is the most significant injection of liquidity yet to the embattled sector.

Country Garden was one of the beneficiaries, receiving a new credit line of Rmb50bn ($7bn) from the Postal Savings Bank of China and access to part of $91bn in new loans from the Industrial and Commercial Bank of China. When the support policies were first unveiled last week, which extend deadlines for maturing bank debt and support bond issuance, the developer’s shares soared and it announced a new rights issue to raise around $500mn.

With thousands of projects nationwide, Country Garden is not only of interest to its shareholders and bondholders inside and outside of China. It is also a barometer of the real estate sector’s health.

“Before the policies we weren’t sure whether any of the private sector companies could survive,” said Andy Suen, head of Asia ex-Japan credit research at PineBridge Investments, describing the government’s moves as a “game changer”. 

“After this set of policies, we think at least some of them can survive. That gives investors an opportunity to pick the survivors”.

‘Relief rally’

The rally was driven in part by relief. Country Garden has come under mounting pressure due to what it called a “severe depression” in the property market. One of its bonds maturing in 2024 fell as low as 14 cents on the dollar earlier this month, and still trades at distressed levels of around 41 cents today.

In October, the company’s total sales were Rmb33bn, far below Rmb54bn in the same month two years ago and last year’s total of Rmb46bn, when the crisis was already under way.

But unlike Evergrande, the world’s most indebted developer, Country Garden has so far not defaulted on its debts, which at the end of June totalled almost Rmb300bn ($42bn).

Developers with investment grade ratings in China’s real estate sector are largely state-owned. In the private sector, where businesses borrowed aggressively, just a handful of firms including Vanke are still rated investment grade while many other names, such as Evergrande, Fantasia Holdings, Modern Land (China) and Kaisa Group have missed payments.

Country Garden, which lost its investment grade rating earlier this year, is somewhere in between. It has been able to rely on its large cash pile, which was Rmb150bn at the end of June, to weather the slowdown in the sector that was aggravated by Beijing’s policies to reduce developer leverage. It made a small profit of Rmb612m in the first half of 2022, according to its interim report.

That number pales in comparison to its profits of Rmb29bn in 2017, after a two-decade period in which reforms and rapid urbanisation spurred the rise of private real estate development in China.

Country Garden’s chair, Yang Guoqiang, was born to a poor family in rural Guangdong, a southern province, in 1955. According to Chinese media reports, he did not wear shoes as a child and could only finish his middle school exams after a government bursary of Rmb2 (28 cents). Before listing the company in 2007, he transferred his shares to his daughter, Yang Huiyan, making her the richest woman in Asia.

Today, Country Garden has over 3,000 projects, more than twice its level in 2017, with the vast majority outside of Guangdong. The land for the Exquisite development in Shanghai was bought in June last year, well after the property crisis had already taken hold. Although it will not be completed until 2024, 600 of its 700 apartments have already been sold.

A manager for the company at the Exquisite site said construction was only delayed during the city’s two-month lockdown to control a Covid outbreak. “The new policy has little impact on the projects in Shanghai,” she said, saying issues for developers were in lower-tier cities.

“Overall Shanghai buyers are more confident in their government,” she added. “When people buy a home, they buy the location”.

Risks remain

The situation in Shanghai masks the risks facing the company. Most of Country Garden’s projects are not in China’s wealthiest cities.

“Lower tier cities’ economic situation has been weaker [during] the economic slowdown in China and property prices have also been declining more than in high tier cities,” said Kaven Tsang at Moody’s, who downgraded Country Garden from investment-grade earlier this month.

He added that Moody’s is not aware of any construction delays at other Country Garden sites, but says the company has been relying on cash to repay its debts and faces issues in accessing funding.

A spokesperson for Country Garden said that while it had focused on top-tier cities in recent years because of their high certainty, it has “not given up on the lower-tier market”.

“Some lower-tier cities still have a large population and people there trust Country Garden”.

The difficulty of assessing progress across thousands of sites in China, especially when pandemic rules have severely constrained access to the country and movement within it, is a major challenge for investors and analysts.

Many of Country Garden’s bonds, especially those that do not come due for several years, imply a risk of default. S&P cited “narrowing funding channels” when it downgraded it last week, and has withdrawn its ratings at the company’s request.

The government’s new policies, which S&P said may mark a turning point and will unleash Rmb1tn of fresh liquidity, are designed to address that issue.

On the edges of Shanghai at the Exquisite project, the final 100 apartments are expected to be sold within the next month. For Yang Guoqiang and investors in his company, the question is whether the same is true across China.

Additional reporting by Hudson Lockett in Hong Kong