Garden Country: A Survivor of China’s Property Bloodbath

On the northwest edge of Shanghai, more than a hundred salespeople in black suits have gathered around a replica of a Country Garden housing project, as an enthusiastic coach gives instructions on how to sell apartments.

Behind the shimmering Project Exquisite showroom, workers and cement trucks moved in and out of a vast construction site where suspension towers were nearing completion.

The scene sparked the glory days of China’s real estate boom over several decades, but the sector is in crisis. Country Garden, the nation’s largest developer by sales, has emerged as one of the leading survivors in an industry that has been plagued by construction delays, defaults and declining sales for more than a year.

Support for the new policy from Beijing has raised investors’ hopes that the worst is over. The government said this week it was ready to deploy more than $162 billion in credit from state banks to developers, in what would be the most significant injection of liquidity yet into the embattled sector.

Country Garden was one of the beneficiaries, receiving a new Rmb50 billion ($7 billion) line of credit from the China Postal Savings Bank and securing part of the $91 billion in new loans from the Industrial and Commercial Bank of China. When the subsidy policies were first revealed last week, which extend bank debt maturity deadlines and support bond issuance, shares of the developer soared and a new rights issue was announced to raise about $500 million.

With thousands of projects nationwide, Country Garden is not only of interest to shareholders and bondholders inside and outside China. It is also a measure of the health of the real estate sector.

“Before the policies we weren’t sure if any of the private sector companies could survive,” said Andy Swain, head of ex-Japan Asian credit research at PineBridge Investments, calling the government’s moves a “game-changer.”

After this set of policies, we think at least some of them can stick. This gives investors an opportunity to choose survivors.”

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Relief march

The hike was partly driven by relief. Country Garden came under increasing pressure due to what it called a “severe depression” in the real estate market. One of its bonds, due in 2024, fell to 14 cents on the dollar earlier this month, and is still trading at woeful levels of about 41 cents today.

In October, the company had total sales of 33 billion renminbi, much less than the 54 billion yuan in the same month two years earlier, and last year’s turnover of 46 billion renminbi, when the crisis was already underway.

But unlike Evergrande, the world’s most indebted developer, Country Garden has yet to default on its debt, which at the end of June totaled Rmb300 billion ($42 billion).

Developers with investment grades in China’s real estate sector are largely state-owned. In the private sector, where companies have borrowed aggressively, only a handful of companies, including Vanke, are still rated as investment grade while many other names, such as Evergrande, Fantasia Holdings, Modern Land (China) and Kaisa Group are not. You get paid.

Garden State, which lost its investment rating earlier this year, is somewhere in between. And it has been able to draw on its huge cash pile, which was 150 billion renminbi at the end of June, to weather a slowdown in the sector exacerbated by Beijing’s policies to limit developers’ leverage. It made a small profit of 612 million RMB in the first half of 2022, according to its interim report.

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That number pales in comparison to its 29 billion renminbi profit in 2017, after a two-decade period in which reforms and rapid urbanization fueled the rise of private property development in China.

Country Garden Chair Yang Guoqiang was born into a poor family in rural Guangdong, Southern Province, in 1955. According to Chinese media reports, he didn’t wear shoes as a child, and he could only finish middle school exams after a government grant of RMB 2 (28 cents). Before the company listed in 2007, he transferred his shares to his daughter, Yang Huiyan, making her the richest woman in Asia.

Today, Country Garden has more than 3,000 projects, more than double the level in 2017, with the vast majority outside Guangdong. The land for the splendid development in Shanghai was purchased in June last year, long after the real estate crisis had taken hold. Although it will not be completed until 2024, 600 of the 700 apartments have already been sold.

A company manager at Exquisite said construction was only delayed during the city’s two-month lockdown to control the Covid outbreak. “The new policy has little impact on projects in Shanghai,” she said, noting that the issues for developers are present in lower-tier cities.

“In general, buyers in Shanghai are more confident in their government,” she added. “When people buy a home, they buy the location.”

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The risks remain

The situation in Shanghai belies the risks facing the company. Most of the Country Garden projects are not in the richest cities of China.

The economic situation of the lower class cities was weaker [during] “China’s economic slowdown and real estate prices are more moderate than in high-tier cities,” said Moody’s Moody’s Kevin Tsang.

He added that Moody’s is not aware of any construction delays at other Country Garden sites, but says the company has been relying on cash to pay down its debts and is having problems accessing financing.

A Country Garden spokesperson said that while it has focused on first-tier towns in recent years because of their higher certainty, it has “not given up on the lower-tier market”.

“Some lower-class towns still have large populations and people there trust Country Garden.”

The difficulty of assessing progress across thousands of locations in China, especially when pandemic rules severely restrict access to and movement within the country, is a major challenge for investors and analysts.

Many Country Garden bonds, especially those that have not matured for several years, indicate default risk. S&P cited “narrowing funding channels” when it downgraded its rating last week, and pulled its ratings at the company’s request.

The government’s new policies, which S&P said could mark a turning point and unlock renminbi trillions of new liquidity, are designed to tackle this problem.

On the outskirts of Shanghai in the Exquisite development, the last 100 apartments are expected to be sold within the next month. For Yang Guoqiang and the investors in his company, the question is whether the same is true across China.

Additional reporting by Hudson Lockett in Hong Kong

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