Introduction

China’s largest property developer, Country Garden, warned that it is on the brink of default as it reported a staggering loss of almost $7 billion for the first half of the year, deepening a real estate crisis that threatens to unravel the country’s already fragile economy.

The Saga of Country Garden

The saga of a company previously seen as one of China’s safest property developers and a pillar of the industry is the latest example of how real estate, which fueled the country’s economic boom, could prove its Achilles’ heel.

Impact on China’s Economy

China’s property market accounts for about a quarter of its gross domestic product and two-thirds of household wealth, but post-pandemic uncertainty and a government crackdown on the sector have weakened sales and had knock-on effects on broader confidence in the economy.

Country Garden’s Failure to React

In a filing with the Hong Kong Stock Exchange on Wednesday, Country Garden said it had failed to grasp and react to the risks of the ongoing real estate slump, most notably in smaller cities that are home to most of its developments. The company expressed deep remorse for its unsatisfactory performance.

Potential Default and Economic Risks

Country Garden’s continued deteriorating financial performance may result in default. This poses a large risk for China’s leaders as they struggle to revive confidence in the Chinese economic miracle and achieve their target of 5 percent economic growth this year.

Implications for Chinese Economy

The housing crisis further undermines the government’s target of economic growth, as households have put off buying homes and other major purchases. Rising youth unemployment, slowing manufacturing, and extreme weather events have already beset the Chinese economy.

Comparison with Evergrande

While a Country Garden default is not expected to be as dire as that of Evergrande, it will still hurt China’s economy, with ripple effects in construction, building materials, consumer spending, and banking.

Global Contagion Risk

The risk of global contagion is relatively low, but China may reduce its imports from the world. However, a massive spillover is unlikely.

Government Measures and Market Response

Chinese authorities have imposed restrictions on debt and resisted bailing out companies or propping up the market with stimulus measures. Instead, they have encouraged banks to lend more to home buyers and eased mortgage rules. However, these measures have not been enough to prevent the collapse of home prices, especially in smaller cities.

Future Challenges for Developers

Country Garden’s results indicate that many developers in China are still struggling, and other developers in the private sector may find it difficult to expand going forward.

Theodora Yu in Hong Kong contributed additional reporting.