Country Garden’s Liquidation Petition Exacerbates China’s Property Challenges: Experts

Unfinished apartment buildings at the Phoenix City residential project, developed by Country Garden Holdings Co., in Shanghai, China, on Jan. 17, 2022. (Qilai Shen/Bloomberg via Getty Images)

News Analysis

Country Garden, once China’s largest developer, announced on Feb. 28 that a liquidation petition has been launched against it for failing to repay a loan worth nearly $205 million—the latest reminder that China’s housing crisis continues unabated.

While this weakens Beijing’s efforts to restore confidence in the property market, analysts believe that winding-up petitions have little chance of being accepted in mainland China.

Ever Credit, Country Garden Holdings’s offshore creditor and a unit of Hong Kong-listed Kingboard Holdings, filed the petition with Hong Kong’s High Court on Feb. 27 for a loan payment of HK$1.6 billion (about $204.5 million) plus interest, according to an exchange filing by Country Garden on the morning of Feb 28.

The court approved the filing and set the first hearing for May 17.

On Feb. 19, Kingboard Holdings cautioned of a profit warning, a credit loss associated with a loan to Country Garden, as one of the factors it cited. According to the company, its projected net profit for 2023 is at least HK$2.02 billion (about $258.2 million), a 45 percent drop from 2022.

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Country Garden has reportedly opposed that petition and said the debts at stake in this case represent a small fraction of its total offshore liabilities. The threat of action from a single creditor wouldn’t jeopardize the developer’s ability to deliver homes, continue its business, or restructure overseas debts, it said.

Until the end of June 2023, Country Garden had borrowed 257.9 billion yuan (about $35.8 million) from various sources, including convertible bonds, corporate bonds, senior notes, and banks, according to its published financial statements. There was a 108.7 billion yuan (about $15.1 million) balance due by the end of June 2024 from its borrowings.

China ‘Unlikely to Recognize the Decision’

The acceptance of Hong Kong’s liquidation order in China is an unclear issue that relates more to law than economics, experts say.

“The creditor petitioning a court in Hong Kong to liquidate Country Garden will not have a material impact on the developer, even if the court rules in its favor. The domestic mainland court is unlikely to recognize the decision,” Hong Kong-based broker Everbright Securities wrote in a Feb. 28 note viewed by The Epoch Times.

The latest in China’s property developers’ pull-down requests follows a liquidation order on Evergrande by a Hong Kong court on Jan. 29, which served as a precedent to the restructuring required to clean up the excesses while protecting the interests of its foreign creditors. That would also be “more challenging to implement because of Evergrande’s complicated organizational structure,” analysts said at the time.

Moreover, according to Charlene Chu, China macro-financial senior analyst at Autonomous Research, the key concern regarding closing up petitions such as the one concerning Evergrande is whether mainland authorities would acknowledge what the Hong Kong courts have decided.

Acceptance of such petitions could upset the “applecart onshore,” Ms. Chu told CNBC International TV in an interview in January, noting that a recognition of the order could further destabilize the domestic property sector if authorities accepted that foreign investors could have claims on China’s domestic assets.

Fitch Ratings also argues that offshore creditors have considerable uncertainty in recovery prospects since their claims would require court recognition from mainland China, as onshore creditors have priority over developers’ offshore debt commitments.

Rising Pressure on Beijing

Nevertheless, at a time when Beijing is attempting to increase confidence in the industry that contributes a fourth of China’s gross domestic product, the petition could reignite worries among homebuyers and creditors over the debt issue in the Chinese property sector, experts say.

The real estate crisis and the burden on Country Garden’s onshore lenders could all be exacerbated by this winding-up petition, diminishing the prospects of a rebound in the property market and the Chinese economy overall.

A number of developers have failed to meet their repayment commitments; and to prevent liquidation or bankruptcy, several have begun or are about to start debt restructuring procedures.

While the macro impact is limited, the winding-up petitions come at a critical moment, when China’s capital flows through direct and portfolio investment by foreign investors are under greater strain. A lower repayment priority for offshore bonds can amplify their risk-averse sentiments.

The reasons for foreign investors’ cautious approach include concerns about China’s economy and skepticism about Beijing’s commitment to supporting it. The world’s second-largest economy continues to confront challenges, including a housing crisis, deflationary pressures, and a shrinking population.

New Measures

In response to the property slump, Beijing instructed state banks to increase financing to residential projects through a “whitelist” process. Several major cities, including Shanghai, have also loosened buying limitations to entice purchasers.

Meanwhile, in an effort to rectify the supply-demand imbalance in the property sector, China’s Ministry of Housing and Urban-Rural Development ordered local governments on Feb. 27 to work on their housing development plans for 2024 and 2025.

The notice instructed local governments to identify the supply, structure, and placement of all types of housing and land in their yearly plans, as well as estimate realistic financing requirements for property projects. Affordable housing would include supply units and home layouts.

Stable and healthy development, as well as waiting times for affordable housing, must be managed as key performance indicators, the order said.

According to analysts, these proposals are intended to improve the stability of housing and land supplies, confirming market expectations and making it simpler for developers to get funding for land acquisition.

“This is a longer-term policy, which we believe will [enable] fiscal funding to purchase idled projects to turn them into affordable housing and provide developers with funding to pay down debt or receivables owed to contractors,” Everbright Securities concluded in its note.