BEIJING/HONG KONG When China's largest developer Country Garden first skipped debt payments in August, its shares tumbled 14%, marking a reversal of fortunes: from industry poster child to another troubled property company struggling to pay its creditors.
The same month, Chinese authorities quietly started talks with Ping An asking the insurance group to take a controlling stake in the developer, according to a Reuters report that was denied by Ping An.
Interviews with contractors, workers and home buyers, as well as a review of lawsuits involving Country Garden, show that for months before its problems became public, the company was struggling to deliver homes and pay contractors on time.
Until the middle of this year, the company was seen by most investors and home buyers as a beacon of strength in a real estate sector grappling with ballooning debt, tighter regulations and slumping sales. It was one of the few developers able to issue state-guaranteed onshore bonds last year and get credit lines from banks in early 2023.
China, the world's second-largest economy, has struggled to recover from COVID shutdowns and issues with its giant property sector. Country Garden's woes highlight the challenge Beijing faces as it seeks to engineer a rescue plan for the company and improve conditions for the wider industry.
"Nobody believed that Country Garden would fail. One important reason is that it seemed to have the implicit guarantee from the state," the Economist Intelligence Unit's Xu Tianchen told Reuters.
Observers believed Country Garden, which has liabilities of around $190 billion and more than 3,000 projects under development, was "good enough and big enough to escape a default or a collapse," he added.
Examples of Country Garden's earlier financial strains, reported here for the first time, include: A valve supplier unpaid since 2022; a steel provider partially paid with apartments; homeowners and workers reporting projects stalled from as early as January; and a Country Garden subsidiary which told a court earlier this year it was "insolvent and overwhelmed."
Lawsuits involving Country Garden and its contractors, including disputes over delayed construction and missing payments, have jumped to a record 459 cases this year, according to data compiled by EIU’s Xu.
Country Garden declined to comment.
After its default, Country Garden has stressed that delivery of homes will remain its top priority, saying last week it had delivered around 460,000 units in the first 10 months of 2023.
In July, only weeks before it skipped debt payments, Country Garden launched a campaign on its WeChat channel titled “Beautiful Delivery”, showcasing newly built apartments and happy homeowners. Some of the projects, it said, were even delivered ahead of schedule.
'FACING LOSSES'
While disputes and delays are par for the course for any large developer, and data in China is often incomplete, the court documents shed light on a contrast between the image Country Garden presented publicly and some of its challenges behind closed doors.
In a case over alleged delayed delivery of apartments in the central megacity Chongqing, the local Country Garden subsidiary told the court it owed 60 million yuan ($8.2 million) in project payments and "faced severe financial losses and was unable to cover its liabilities", according to a verdict handed down in June.
It said it was, "insolvent and overwhelmed, and even if the court reduced the damages at its own discretion, it may still be hard for the defendant to fulfill its obligations in the future."
Other court cases feature similar examples from last year and early this year: They involve sums as small as 267,475 yuan in arrears for 50% of an elevator installation fee or 2.8 million yuan demanded by an electrical installation company.
Some large contractors decided to skip the court process altogether, according to a steel supplier based in south China. He told Reuters "the priority for us is to get our money back through negotiations instead of filing a lawsuit, which is very time-consuming and won’t necessarily yield a satisfactory result."
Country Garden owed the supplier, who did not want to be identified due to the sensitivity of the situation, an equivalent of several million dollars for reinforced steel bars.
He was promised half of the owed amount in unfinished apartments. The other half was to be paid in cash, but the supplier has so far only received a quarter of the payment.
"The situation deteriorated from the second half of 2022, and it’s become even worse from the start of this year, when the payment to us was delayed,” said the supplier.
The impact of Country Garden’s cash crunch has reverberated even after the missed August payments.
A week after that, contractor Qiao Jingjing, said his construction site in Xinzheng, a city of 1.2 million in Henan Province, also stalled.
Qiao, 38, was left with 20,000 yuan in unpaid wages for two months of his work. He said his company, Jujiang Group, which was a subcontractor at the site installing aluminum sheets, is owed more than 770,000 yuan.
Country Garden did not respond to questions about the payment or delivery disputes.
Qiao said apartment buyers and construction workers kept coming to Country Garden offices seeking information.
"But Country Garden's sales staff have never given us any reply to these questions: When will the construction resume? When can the property be handed over to the owners? When will the workers get their wages?”
($1 = 7.2800 Chinese yuan renminbi)
(Reporting by Clare Jim, Liangping Gao, Amy Lv, Laurie Chen and Beijing newsroom; Editing by Antoni Slodkowski and Lincoln Feast.)
