More China dithering as Country Garden crashes


Sinocism kicks us off:

Stock market support measures – To help support the stock market, over the weekend policymakers reduced the minimum ratio for margin purchases, cut the stamp duty on transactions by 50%, and announced measures to slow the pace of IPOs and make it harder for major shareholders to reduce their holdings. The market went nuts at the open, for a few minutes, and while at the end of the day it was still up Bloomberg reported that the stock exchanges told big mutual funds “to refrain for a day from selling more onshore shares than they purchased”. Without more meaningful measures to restore confidence, measures the top leadership seems either unwilling or unable to take, regulatory tweaks like these will probably be seen as good selling opportunities.

Real estate policy tweaks as Country Garden teeters – Policymakers have taken more marginal steps to try to goose demand for property, with a loosening of the definition of first-time homebuyer, so more people can quality for lower down payments and mortgage rates, and an extension of a tax rebate. In previous real estate downturn cycles moves like these would be seen as a sign of an approaching policy “bottom” and so buyers would start returning. That reaction seems unlikely to play out this time, especially as the news around the massive developer Country Garden gets worse by the day. Caixin has a cover story on the Country Garden’s “debt bomb” and quotes one bond investment executive saying “If no external force comes to its rescue and Country Garden falls apart, other private property developers will collapse one by one, and the last bit of market confidence will be worn away”. There is more discussion about the merits of ending local restrictions on home price cuts, though while big drops may help spur purchases it is not clear how low the clearing prices may actually be.

Here is more from Caixin:

Like many other property developers, Country Garden’s business took off in 2015, when many cities started urban redevelopment projects, becoming the largest developer by sales in 2017.

Before regulators tightened controls on their financing in 2020, Country Garden thrived on borrowed money. Relying on high leverage, rapid turnover and massive borrowing, the company expanded quickly in China’s small and medium-sized cities.

But the crackdown on financing aimed at curbing risks at overleveraged developers put an end to that growth model.

Compared with many of its distressed peers, Country Garden was in a better position during the early stages of the property market downturn as it managed to repay debts, deliver projects, and make use of government support to borrow money from financial institutions and issue bonds. However, the deepening market decline since mid-2021 has amplified the company’s capital challenges.

Now, Country Garden is scrambling for a lifeline. The company is mulling over restructuring its onshore bonds and has hired China International Capital Corp. Ltd. as a financial adviser, sources with knowledge of the matter told Caixin.

As the company is short of cash to make repayments for its maturing onshore bonds or those with a put option due in September, it may first extend those before dealing with offshore bonds, according to the sources. Relieving some of the immediate repayment pressure could help it focus on completing presold housing projects, they said.

Country Garden last week proposed extending an onshore bond maturing in September by three years, but faced challenges in securing approval from bondholders. On Friday, the company made a last-minute change to postpone the deadline for holders to vote on its debt extension plan in the latest effort to avert a default.

“If no external force comes to its rescue and Country Garden falls apart, other private property developers will collapse one by one, and the last bit of market confidence will be worn away,” an executive at a bond investment company said

Sliding into crisis

By the end of 2022, Country Garden’s financials appeared fairly sound. The company had 147.6 billion yuan in available cash on its balance sheet, including unrestricted cash and cash equivalents amounting to 128.3 billion yuan — sufficient to cover its short-term debt of 93.7 billion yuan due in 2023.

However, the company recently told creditors that its available funds are only enough to complete existing projects, without giving any explanation of its worsening liquidity, a bondholder said.

Country Garden is known for its strategy of tightly controlling spending based on revenue. Land acquisition and construction costs usually constitute the major portion of a developer’s expenditures.

As the market cooled and sales slowed, Country Garden’s spending on land purchases slid to 5.8 billion yuan in the first seven months, ranking the 24th in the industry, according to independent real estate research institution China Index Academy.

But the company’s spending on construction has remained high as it strives to deliver projects on schedule under pressure from authorities. Last year, discontent over long stalled projects triggered protests and mortgage boycotts in many cities, forcing local governments to step in and urge developers to complete construction on time.

In 2022, Country Garden delivered housing 700,000 units, the most among all developers and exceeding the combined amount completed by China Vanke and Evergrande, according to Caixin’s calculation based on public information. Country Garden said it expects total 2023 deliveries to reach another 700,000 units, with its first half deliveries totaling 278,000.

But compared with Vanke and Evergrande, which focus more on big cities, Country Garden’s heavy bet on third- and fourth-tier cities means its promise of housing deliveries could be much pricier as housing sales and prices have plunged deeper in smaller cities.

“Consider a project with 500 units. If only 100 units were pre-sold, the entire project must be completed to ensure the delivery of these 100 units, regardless of when the remaining 400 units can be sold,” a real estate company staffer said. The greater the number of units that are sold in advance and at higher prices, the lesser the funds developers need upfront to cover construction costs, said the person.

S&P Global estimated that Country Garden’s 2023 construction costs will be around 130 billion yuan.

Based on Country Garden’s 2022 financial data, the company needs monthly sales of at least 22 billion yuan to keep construction on schedule and maintain basic operations, excluding debt payments and land purchases, according to a banking industry insider.

But Country Garden’s sales have been sliding this year. In the first seven months, they fell 35% year-on-year to 140.8 billion yuan, according to the company. This exceeds the industry’s average drop of 4.7%during the period, according to data China Real Estate Information Corp. (CRIC).

Although Country Garden maintained its top position in terms of area sold, it slid to sixth place in terms of sales value, CRIC data showed. That underscores the company’s business weakness due to its focus on smaller cities, which experienced faster growth over past years, but were also hit much harder in the latest housing market downturn.

Amid weakening demand, housing inventories in third-and fourth-tier cities reached 19 months of supply in May 2023, compared with 12.3 months in the top-tier cities, according to CRIC.

In a recent letter to investors, Country Garden’s management apologized for its recent troubles and for the first time acknowledged the company’s overreliance on smaller cities, saying its awareness of potential risks was inadequate.

Capital drain

At the end of 2022, Country Garden’s interest-bearing liabilities totaled 271.3 billion yuan, a decrease of 98.3 billion yuan or 26.6% from 369.6 billion yuan in 2019, according to the company’s financial report.

Country Garden’s efforts to reduce its debt burden are evident, but the sheer magnitude of the problem remains a significant challenge and has greater financing demands, several financial institution sources said.

“The current financing environment for private enterprises is undeniably harsh,” said a banking source familiar with the company.

Country Garden had maintained a positive cash flow from financing for 13 consecutive years before 2019, company financial reports showed. But it did an abrupt about face in 2020 after authorities laid out “three red lines” that set leverage benchmarks builders had to meet if they wanted to borrow more money. From 2020 to 2022, the company posted an accumulative net outflow of 125.7 billion yuan.

Bank loans were an important source of funding for Country Garden. In 2022, its borrowing from banks and other institutions totaled 162.5 billion yuan, down 44 billion yuan from the previous year.

“In the second half of 2022, Country Garden had trouble repaying loans,” said a Guangdong financial industry source. “Local governments intervened to arrange loan extensions with banks, but new lending has remained limited.”

In November, a 16-point policy package to direct more financial support to the ailing property market was unveiled by the government. But industry sources said the effects have been limited, especially for private developers.

“While many private developers obtained significant preliminary credit approvals, companies that actually received loan disbursements are scarce,” said a property industry researcher at a brokerage firm.

Property projects in smaller cities in particular are given a wide berth by banks due to concerns about weak sales, said a bank executive. Another banker at a state-owned lender said government-backed developers are much more favored than their private counterparts when it comes to bank loan approvals.

Financial institutions have significantly lost confidence in private developers, and Country Garden is no exception, a person close to the central bank said.

Borrowing from the bond market is also challenging for private developers. In the first seven months, bond financing by the real estate sector totaled 285.6 billion yuan, of which only 16.5 billion yuan was raised by private developers, according to China Index Academy.

The small scale of bond issuances by private developers is not due to any regulatory restrictions, but rather because there is no demand for them, a bond regulatory official said.

Prior to its current predicament, Country Garden had better access to funding compared with most private developers as it was still able to take out loans and issue bonds with a government-backed guarantee.

Indeed, in 2022 Country Garden raised over 9 billion yuan through 10 bond issuances, according to Caixin’s calculations based on public information. But so far in 2023, the company has issued only two medium-term notes in domestic market to raise 1.7 billion yuan and an offshore note of 1 billion Thai baht ($28.5 million).

But the money raised is just a drop in the bucket compared with Country Garden’s debt obligations.

“The 1.7-billion-yuan financing is not even enough for Country Garden to cover two weeks’ expenses,” a banking industry source said.

Between delivering presold housing projects and making debt repayments, the holes in its cash flow have become too big to fill, Zhu Wence, an independent property market analyst, wrote earlier this month.

So far this year, Country Garden has repaid 21.4 billion yuan of its bonds. As of Aug. 15, the company had outstanding bonds including asset-backed securities totaling some 102 billion yuan, with 19.9 billion yuan of onshore bonds and 78.6 billion yuan of offshore bonds, according to Ratingdog. About 15.5 billion yuan of the debts will mature by the end of 2023.

Stick a fork in it. It’s done. The geographic footprint of incomplete projects is the worst-case scenario. It will join the Evergrande zombie ranks in due course.


Really, all we are waiting for now is to see how bad it gets before banks are drawn in directly or via local governments or shadow banks. Credit Agricole:

Rising property NPL the next concern

In recent years, Chinese banks have steadily reduced their balance sheet exposure to the property sector since 2019, due to tightened regulatory requirements. The total amount of property-related loans is at RMB53.4trn (or 23% of the total) as of June 2023, including RMB38.6trn in mortgages (17%) and RMB13.1trn in developer loans (6%). This is compared to a 26% share in loans to services, 16% to infrastructure and 9% to industrials.

The NPL ratio for mortgages has remained steady and low, below 0.5% as of June 2023, according to the PBoC. The major risk comes from mortgages related to those sold projects but yet to be delivered, while the recent trend of early mortgage repayment would negatively impact bank earnings during the rate cut cycle while the major banks are yet to lower rates for existing mortgages.

Meanwhile, NPLs for developer loans have been soaring since H220.According to a sample of 15 listed major state-owned and joint-stock banks that we monitor, property NPLs rose more than five-fold to RMB270bn at end-2022, from RMB50bn at end-2019, and accounted for 15% of total NPLs outstanding. Correspondingly, the property NPL ratio rose to 4.2% at end-2022 from the stable rate of around 1% at end-2019 and prior. Such ratio jump comes even with a looser rule of property NPL classification, as a part of the “16-point” measures introduced by the PBoC in November 2022, which encouraged banks to negotiate with property developers for payment extension and debt restructuring, and allowed the risk classification of targeted loans for home projects to be kept unchanged until end-2024.

How much further could bank NPLs rise if the property sector downturn continues?

If we assume a half of the developer loans are granted to private developers (which could be higher than the actual figure, as the PBoC suggests nearly half of the developer loans are for land & public housing construction and the rest are to developers for home project construction), and 25% of home projects by private developers would fail the delivery while most projects by state developers would be delivered, the property NPL ratio could rise to around 13% and the mortgage NOL ratio could rise to 3%, in turn driving the sector NPL ratio to 2-3% from the current 1.3%.

Furthermore, as housing and land banks are dominant collaterals for collateralized bank loans (35-45% of total loans for state-owned banks) including those loans to non-property sectors, the devaluation of property-related assets would impair the collateral quality and post upside risks to NPLs beyond the property-related loans in the banking sector.

Immense losses are piling up in the Chinese property construction supply chain. Where they will ultimately land nobody knows. But land they will.


When they do you can kiss goodbye to iron ore forever as the Chinese economy never recovers former levels of construction.

A nasty string of bearish candlesticks may suggest Dalian is near peaking:


Looks like the classic pennies in front of the steamroller.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.