2023-08-15 10:20:12
3 hours ago
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Country Garden’s headquarters in Shunde, Foshan. Unlike Evergrande, its main business is concentrated in third- and fourth-tier cities in China.
One of China’s largest real estate companies, Country Garden, suddenly faced a break in its capital chain, and the cloud of the “Evergrande-level” crisis once once more shrouded the Chinese property market.
In the first half of this year, Country Garden was still the largest sales area among Chinese real estate companies. However, there were “unexpected” problems with two US dollar bonds. The size of each bond was US$500 million. Interest of $22.5 million was required to be paid on March 7, but the creditors did not receive the interest.
Bond defaults are considered to be the first step in real estate companies’ thunderstorms. In the past two years, there have been many thunderstorms among various real estate companies in China, and most of them started the crisis with bond defaults.
However, there is still a 30-day grace period for this bond, and Country Garden has not yet constituted a default. In addition, according to the financial situation disclosed by Country Garden, it is not difficult to cover the interest of more than 20 million US dollars. Therefore, there are speculations in the market that Country Garden’s postponement of interest payment is to initiate bond restructuring.
On August 8, Country Garden ushered in a “double killing of stocks and bonds”. Many domestic bonds fell by more than 20%, and stocks fell by 14.4%, and fell continuously for several days therefollowing.
On August 10, Country Garden continued to “exposure itself” and issued a profit warning, saying that in the first half of 2023, there will be a net loss of 45 billion to 55 billion yuan. Mo Bin, President of Country Garden, said in the announcement that Country Garden has encountered the greatest difficulty since its establishment. The current priority is to “make every effort to ensure the safety of the company’s cash flow” and to speed up sales and response with the goal of “minimum cost and maximum value”. Collect creditor’s rights, actively expand financing, and strive to revitalize large and difficult-to-remove commercial assets.
On August 14, the trading of 11 bonds under Country Garden was suspended, involving a total of 15.7 billion yuan. The next step will be to negotiate with creditors and seek debt restructuring.
The next Evergrande?
Country Garden is facing a crisis, which makes people think of Evergrande. Both belong to one of the largest real estate companies in China. Both started in Guangdong. Country Garden started in Foshan, and Evergrande came from Guangzhou.
In 2016, the property market boom spurred by the monetization of China’s shed reform pushed Xu Jiayin to the throne of China’s richest man, and Evergrande also became China’s largest real estate company for a time.
Unlike Evergrande, Country Garden’s acquisition of land is concentrated in China’s third- and fourth-tier cities, and less involved in first- and second-tier cities. However, it is comparable to Evergrande in terms of volume, and the debt scale of the two is also similar. Evergrande’s debt is 2.43 trillion , Country Garden 1.43 trillion yuan. However, Country Garden’s asset-liability ratio is 82.3%, while Evergrande once reached 132.6%. The latter is already insolvent, but the former is not yet.
So will Country Garden follow the path that Evergrande has traveled in the past two years?
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After the thunderstorm at Evergrande, there were group incidents of house buyers protesting and demonstrating, but Country Garden has not encountered such incidents so far.
“Unlike Evergrande, which was expanding everywhere before, Country Garden has been relatively cautious in its operations in the past few years, trying to avoid stepping on the ‘three red lines’, and its assets and liabilities are also healthier.” Anbang Think Tank told BBC Chinese that if Country Garden eventually defaults The big reason for the explosion of mines is not the problem of its own operation, nor the problem of “disorderly expansion”. Moreover, the actual losses and direct impact on financial institutions, home buyers, suppliers, etc. may be much smaller than that of Evergrande, which is currently “laying flat”.
“Three red lines” refers to the fact that in August 2020, the Chinese government required real estate companies to control the scale of liabilities. Specifically, there are three red lines: one is that the asset-liability ratio following excluding advance receipts should not exceed 70%, and the other is that the net debt ratio should not exceed 70%. 100%, and third, the short-term cash-to-debt ratio is less than 1.
If one of them is violated, the annual debt growth rate shall not exceed 10%, if two are violated, it shall not exceed 5%, if all three are violated, no new interest-bearing debts shall be added.
Among the real estate giants, only three have all three, including Evergrande.
The inability to borrow new debts means that Evergrande suddenly cannot “borrow new ones to repay old ones”. At the same time, the government has intensively introduced measures to curb the rise in housing prices and “crack down on unreasonable demand”, which has caused real estate companies to start to decline in housing sales. With the superposition of the two, Evergrande’s cash flow crisis broke out.
During the same period, Country Garden’s performance can be called a “three good students”-in 2021, Country Garden only failed to meet the standard of “the asset-liability ratio excluding advance receipts does not exceed 70%”. By 2022, Country Garden finally achieved the “three red lines.” None hit.
Financially, Country Garden is also relatively healthy. Last year, it recorded an operating income of 430.37 billion yuan and a core net profit of 2.61 billion yuan attributable to shareholders. Not only has the net debt ratio further dropped to 40%, reaching the lowest value in ten years, the company even has a cash balance of approximately RMB 147.55 billion.
When the policy was relaxed at the end of last year, Country Garden was officially regarded as a “demonstration enterprise”, allowing it to issue bonds and even obtain bank financing support. For example, in November last year, Country Garden signed a strategic cooperation agreement with ICBC, Bank of China, and Postal Savings Bank of China. Comprehensive credit support of 100 million yuan.
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Unlike Evergrande, Sunac and many other big and small real estate companies that “exploded thunder”, Country Garden survived the most dangerous time for real estate companies last year.
Down before dawn?
Anbang Think Tank believes that, unlike Evergrande, Sunac and other large and small real estate companies that “exploded” before, Country Garden survived the most dangerous time for real estate companies last year, and following the real estate policy shifted, it was able to obtain normal financing. The possibility of surviving is already very high.
In 2021 and 2022, when various real estate companies have “thunderstorms”, Country Garden’s performance is acceptable. In 2021, it will achieve a net profit of 41 billion yuan; Said, the loss is not serious.
However, just half of 2023 has passed, and the net loss is equivalent to more than 8 times that of the whole year of 2022.
Country Garden’s expected performance disclosed on July 31 also explained its own predicament: “The expected net loss is mainly due to the impact of the downturn in sales of the real estate industry, resulting in a decline in the carryover gross profit margin of the real estate business and an increase in the impairment of property projects; and foreign exchange fluctuations have caused expectations net foreign exchange loss.”
Just one week before Country Garden disclosed its expected results, the Political Bureau of the CPC Central Committee held a meeting to deploy economic work in the second half of the year. One of the sentences, “To adapt to the new situation of major changes in the supply and demand relationship in the real estate market, adjust and optimize real estate policies in a timely manner” particularly attracted attention. It is a signal to loosen the real estate industry.
On the second day following the meeting, China’s A-shares and Hong Kong stocks rose sharply, especially in the real estate sector. Many key companies, including Country Garden, rose for three days in a row.
However, at this time, the desolation of the real estate industry is very obvious. In the first three weeks of July, the sales volume of new homes in 30 major cities fell by 32% year-on-year.
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Sales stagnation is currently the main problem facing real estate companies, including Country Garden.
“Different from external influences such as previous policy factors and epidemic factors, the continuous decline of the real estate market itself is the fundamental factor that is difficult for Country Garden to support. If it falls at this time, it can be said to fall ‘before dawn’.” Anbang Think Tank say.
Many voices called for the rescue of Country Garden.
Ren Zeping, the former chief economist of Evergrande Group, posted a post on Weibo, calling for “helping high-quality private housing companies such as Country Garden and Longfor.” He believes that this is not only the last bastion to help these private real estate companies, not only because it is too big to fail, but also the need to keep the bottom line of financial risks and people’s livelihood. “Dawn is ahead, and high-quality private housing companies should not fall before dawn.”
Ren Zeping said that if the largest real estate company collapses suddenly, it will impact market confidence, economic recovery, financial risks, residents’ home purchase expectations, and more than 60 upstream and downstream industries, which will affect the employment of tens of millions of people. The last bastion of private real estate companies such as Longfor It may also be difficult to protect yourself, which is an unbearable burden. According to international experience, real estate is the mother of cycles, 9 real estate crises out of 10.
Zhu Wence, a well-known real estate commentator in Shenzhen, wrote an analysis saying that once the contract is breached, it will be a breach of trust for anyone who breaches the contract. If the building cannot be handed over, small property owners will protest, and if they cannot repay foreign debts, they will be run on by creditors. At this time, the company is like a bank, falling into a run on the tide. “Last year, the story happened to other giants, let’s do it once more.” The expected phenomenon is that the real estate of Country Garden will soon be very difficult to sell. If it evolves to that point, it will be more terrifying. Country Garden has too many projects. I am afraid that no one in the same industry, nor any local city, has the ability to take over this big thunder.
Prospects for China’s Property Market
China’s property market is greatly affected by policies. Ren Zhiqiang, a former well-known real estate developer in China, has a popular metaphor for this-real estate is like a “chamber pot”.
For example, in 2016, under the leadership of the Chinese government, a round of monetization of shed reform was launched. In short, it was to demolish the old and small areas in the city that were difficult to support, and to give cash subsidies to the relocated households, encouraging them to use the money to relocate buy a house.
This policy caused the “volume and price to rise” in China’s real estate market at that time. Real estate companies used aggressive high-leverage operations to take advantage of the “east wind” of the policy and instantly inflated, but financial risks were also accumulating.
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High-rise buildings in the Wangjing area of Beijing
In the report of the 19th National Congress of the Communist Party of China in October 2017, for the first time, “housing should not be speculated”. Since then, supervision has gradually increased until the “three red lines” in 2020.
Since then, “housing to live in, not speculation” has almost become a contemporary idiom, representing the government’s strongest supervision of the property market.
The Politburo meeting in July did not mention “housing is not for speculation”. On the contrary, it promised to “adjust and optimize the real estate policy in a timely manner”, “implement policies according to the city, and make good use of the policy toolbox”. Does it mean that “housing is not for speculation” is a thing of the past?
Hu Rong, an assistant professor of real estate and finance at the Chinese University of Hong Kong Business School, said that the relationship between “housing to live in and not speculation” and stimulating the property market is very subtle. Essentially speaking, “housing to live in, not speculation” means to curb investment demand, but it does not exclude residents’ consumption demand for self-occupation. The purpose of relaxing property market restrictions is to encourage residents to live in their own consumption, but not to encourage speculative real estate speculation.
“However, housing itself has the dual attributes of consumer goods and investment targets. This makes the encouragement or suppression of these two types of demand often occur at the same time, making it difficult to grasp the effectiveness of suppression or encouragement policies.”
Huang Deji, executive director of the research department of Kingston Securities, said that the problem of China’s real estate industry has been brewing for a long time. It has wiped out the wealth effect of investors, and now no one wants to buy a house.
Huang Deji believes that the impact of the real estate industry on the economy has reached a “critical moment”, and regulators should implement more policies, including further cutting interest rates and lowering the reserve ratio.
As soon as the words fell, the People’s Bank of China announced on Tuesday that it would cut the medium-term lending facility (MLF) interest rate by 15 basis points, which means that China will continue to cut interest rates to stimulate the economy.
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