Officials hailed the company, led by chair Yang Huiyan, as a model developer. It avoided default even as competitors missed payments in late 2021 and early 2022. It delivered its audited results on time, while auditors were busy bailing on the sector. And investors were hopeful that Country Garden, which generated $64 billion in revenue last year, would benefit from Beijing’s promised support measures for the housing market. 

Yet now China’s property crisis is getting so bad that even this role model is now under threat, and it doesn’t bode well for the industry.

“If Country Garden, the biggest privately owned developer in China goes down, that could trigger a crisis in confidence for the property sector,” Edward Moya, a senior market analyst for Oanda, wrote in a Tuesday note.

On Tuesday, Country Garden confirmed that it failed to make a $22.5 million interest payment on some of its dollar-denominated bonds. If it doesn’t pay within a 30-day grace period, it will be in default for the very first time.

“The developer’s struggle to address even a modest coupon payment underscores the extent of its cash crunch,” Sandra Chow, head of Asia-Pacific research at CreditSights, told the New York Times. 

The bonds in question are now trading at just 8 cents to the dollar, according to the Wall Street Journal citing Tradeweb data, a sign that traders have all but priced in a default.

In a stock filing to Hong Kong’s exchange on July 31, the developer had warned of a net loss in the first half of 2023, down from a net profit of $264 million in the previous year’s period. It blamed the loss on charges incurred from writing down the value of its properties following a downward slide in home prices.

In its filing, Country Garden said it would “actively seek guidance and support from the government and regulatory authorities.”

The very next day, however, the developer abruptly canceled a $300 million share sale, citing a failure to come to a “final agreement.”

Investors now fear that Country Garden could be the next major developer to fall in China’s already yearslong property crisis. Shares in the developer are down by over 60% since the start of January.

Country Garden vs. Evergrande

Founded in 1992, Country Garden stood in contrast to China Evergrande Group, the massive property developer whose default in 2021 arguably marked the start of China’s property crisis. 

Evergrande, at one point China’s largest developer, loaded up on debt to fuel its rapid expansion. The company splurged on big, expensive projects, like Ocean Flower Island, a $35 billion set of artificial islands similar to Dubai’s Palm Jumeirah. 

Yet new rules on how much debt developers could hold sent Evergrande into a liquidity crisis, and the company defaulted on its foreign-held debt in December 2021. Other developers, like Kaisa Group and Shimao Group Holdings, also defaulted on their payments.

Last month, Evergrande finally revealed that it has lost a combined $81 billion in 2021 and 2022. The developer also reported $340 billion in liabilities, including $85 billion in more short-term borrowings. 

Unlike Evergrande, investors saw Country Garden as far more financially prudent. The developer didn’t borrow as heavily as its peers, and focused on building affordable homes in China’s less prominent and less developed cities. The developer had $199 billion in liabilities at the end of 2022, according to Bloomberg.

Still, Country Garden could not escape the overall slowdown in China’s property sector, and the developer was forced to report a $900 million loss for 2022 after revenue slumped by a fifth.

Yet the hopes of Country Garden’s investors had initially been buoyed by official promises of support for the property sector late last year. The sector received access to billions of dollars in loans from Chinese state-owned banks, as part of a broader scheme to provide liquidity to developers. 

Now, more than halfway through 2023, the story is far different. Home prices are falling again: An official index of home prices in 70 cities reported a 2.2% year-on-year decline last month, and investment bank Goldman Sachs is warning of “persistent weakness” in the real estate sector. 

Country Garden’s decision to focus on China’s poorer areas may also be backfiring, since home price declines have been steeper in less developed cities.

Wealthier cities are also considering easing restrictions on property purchases, threatening to soak up demand from low tier cities, which account for 70% of national new home sales volume, analysts at Nomura noted in a report last week.