Unpacking the latest challenge for China’s Country Garden – Ever Credit Limited's liquidation petition

Country Garden just got hit with another blow.

Unpacking the latest challenge for China’s Country Garden – Ever Credit Limited's liquidation petition
The company logo of Chinese developer Country Garden is pictured at the Shanghai Country Garden Center in Shanghai, China August 9, 2023. REUTERS/Aly Song/File Photo

The backstory: China's property market has been a powerhouse in the country's economy for years, contributing a big chunk of its GDP (somewhere between 17-29%). But a lot of its rapid development was fueled by borrowing. Things took a turn in 2020 when Beijing stepped in with new regulations to tackle the mounting debts of major real estate players like Evergrande. That's when Evergrande found itself buried under a mountain of liabilities soaring over US$300 billion and became the first property giant to default on its debts in 2021. And things snowballed from there, with the whole real estate industry feeling the shockwaves. More than 50 Chinese property developers have defaulted on debts since 2021.

Another Chinese property giant, Country Garden, faced similar troubles. Once a top player in the nation's homebuilding scene, it hit a rough patch when it missed an interest payment on a US$500 million note due in 2025. Eventually, Country Garden was declared to be in default for not paying that debt. 

More recently: To counter this downturn, China's been making moves like boosting lending for residential projects, easing buying restrictions in cities like Shanghai and even slashing mortgage rates to help stimulate demand. Then, last month, a Hong Kong court ordered the liquidation of China Evergrande, the world's most indebted property developer, putting more pressure on the country's real estate market. 

The development: Country Garden just got hit with another blow. One of its creditors, Ever Credit Limited, filed a winding-up petition for the company's liquidation earlier this week for not paying a loan of HK$1.6 billion (US$204.4 million). Country Garden has said it plans to fight the petition and take legal action. At the same time, the company also vowed to maintain ongoing discussions with its offshore creditors on its restructuring plan. The company said that it believes this won't slow down its restructuring outside of China. Still, a court hearing has been set for May 17, and the announcement caused a more than 12% drop in Country Garden's shares listed in Hong Kong on Wednesday, 

Key comments: 

"It will take some time for homebuyers' incomes and confidence and overall demand to recover in the property sector, which is still in the process of gradually bottoming out," said Zhang Dawei, an analyst at property agency Centaline.

"Country Garden was once considered a safe name, even as peers like Evergrande and Sunac China went bankrupt around them. Its default shows there really aren't any safe names in this sector left," said John Bringardner, head of Debtwire. 

"We still believe mainland China's property market is charting an extended L-shape recovery and that national sales will drop again in 2024, by 5%," said economists at S&P Global Ratings last month in a research note.