Long before rescue talks, Country Garden struggled to build homes, pay bills

Jujiang Construction

09/11/2023 23:00

BEIJING/HONG KONG, Nov 10 (Reuters) - 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.)
 ((antoni.slodkowski@thomsonreuters.com;))