[Dongle Dongle] Living in a Mud House in China, Then Bought a Pre-sale Right... Default Disaster Strikes

Default Declaration on Dollar-Denominated Bonds
Damage Concentrated Mainly in China's 3rd and 4th Tier Cities
Wage Arrears and Unfinished Projects Cause Uncertainty
Construction Workers and Ordinary Investors Stage Mass Protests

Readers who have been closely following recent international news may have frequently encountered reports about the downturn in China's real estate market. Among these, one company that has been mentioned particularly often is Country Garden (Bigu Wuyuan). On the 25th (local time), the deadline for a grace period, Country Garden declared a default after failing to pay $15.4 million in interest on its dollar bonds.

Country Garden's default not only shocked the market but also pushed countless ordinary citizens into a housing crisis. Especially since Country Garden, unlike other real estate developers, has been actively developing properties mainly in small and medium-sized cities, the damage is expected to be even greater. However, while the losses inflicted on the financial market by unpaid interest and other debts of Country Garden are frequently reported in foreign media, the damage suffered by ordinary people is rarely discussed in detail. Today, we want to share the untold story of the hardships faced by Chinese citizens amid Country Garden's default crisis.

The Country Garden residential complex in Nanjing City, Jiangsu Province, China, completed last August [Image source=AFP Yonhap News]

Wage Arrears and Loss of Shelter... Collective Protests by Ordinary Citizens and Workers

This is the first time Country Garden has defaulted. On the 18th, it declared that it was unable to pay interest on $15.4 million worth of dollar bonds maturing in 2025. Even if it manages to pay the interest this time, overcoming the crisis will not be easy. On the 27th, a $40 million grace period expires, and on the 7th and 8th of next month, grace periods for $48.76 million and $17.88 million in interest payments will end, respectively.

The market is predicting that Country Garden could fall into what is called a cross default. Cross default means that if a default is declared on one debt contract, creditors can unilaterally declare defaults on the debtor's other debts. Currently, Country Garden owes a staggering $10.96 billion in offshore bonds. It also has to repay 42.4 billion yuan (approximately $5.81 billion) in non-yuan-denominated loans.

On August 18th, a construction site of the Chinese real estate developer Country Garden in Tianjin, China.
[Image source=Reuters Yonhap News]

While the market focuses on the unpaid interest on Country Garden's bonds, ordinary citizens have suffered enormous losses comparable to those of creditors.

In particular, cases of citizens suffering significant property losses are increasing as housing construction has been indefinitely delayed and housing prices have plummeted. Bloomberg introduced the case of a woman named Huai Lan living in Juye County, Shandong Province, China. She bought a Country Garden home in 2021 for 290,000 yuan (about 53,499,200 KRW), but due to construction delays, she has been unable to move into the apartment. Huai Lan spent her childhood in a mud house and diligently saved money with the determination to buy a brick apartment. She invested all her assets to purchase the apartment rights, but the apartment she bought remains unfinished, and its price has dropped by 25%. Since there are no buyers, it is uncertain whether she will lose only 25% or even more of her money.

There are also cases of citizens who were supposed to receive housing as compensation for urban development but have nowhere to go due to Country Garden's construction delays. Tom Chen from Zhejiang Province, China, spent 2 million yuan (about 368.84 million KRW) to build six five-story houses. The government ordered him to demolish all the houses to proceed with a development project. Chen was promised six Country Garden apartments, scheduled for completion by the end of this year, free of charge as compensation for demolishing his houses. However, as the move-in date approaches, construction has been halted, leaving Chen with nowhere to go.

Construction workers have fallen into hardship as they have not been paid wages due to the work stoppage. At Country Garden's construction site in Guangdong Province, workers have gone on strike after months of unpaid wages. According to Bloomberg, Country Garden responded to the strike by immediately firing a large number of on-site workers and subcontractor personnel.

Angry citizens and construction workers eventually began protesting in front of Country Garden's office, demanding the resumption of construction and payment of wages. Videos showing construction workers and citizens affected by property losses appealing to authorities to ensure Country Garden pays wages and resumes construction have been spreading on Douyin, China's social media platform. Some protesters exhibited aggressive behavior, leading to police surveillance.

Country Garden Expands Business Mainly in Small and Medium Cities... Concerns Over Impact on Ordinary Economy

The Chinese government is also closely monitoring the situation. Country Garden's default crisis is likely to cause significant shocks to the economies of ordinary people in small and medium-sized cities, beyond merely causing turmoil in financial markets.

Country Garden headquarters in Foshan City, Guangdong Province, China [Image source=Bloomberg]

Country Garden, along with Evergrande, has grown by expanding construction projects mainly in small and medium-sized cities in China. China classifies cities into tiers 1 to 5 based on population and economic development. Tier 1 cities include Beijing, Shanghai, and Shenzhen, while tier 3 and 4 cities are medium-sized cities with populations between 1 million and 5 million. Country Garden has grown by supplying small and medium-sized apartments in tier 3 and 4 cities, considering the increasing demand for modern apartments due to industrialization. According to the South China Morning Post (SCMP), 60% of Country Garden's new housing supply is located in these tier 3 and 4 cities.

Based on this strategy, Country Garden became one of China's top three developers, but it began to falter due to stringent government real estate regulations and decreased housing demand caused by COVID-19. The Chinese government tightened funding, leading to a liquidity crisis, and housing sales plummeted amid the economic downturn. In the first half of this year, Country Garden's housing sales (January to July) fell 35% year-on-year to 140.8 billion yuan, resulting in a net loss of about 10 trillion KRW.

If a company that has grown based on small and medium-sized cities falls into crisis, the economies of ordinary people in tier 3 and 4 cities are expected to be hit directly. Moreover, since Country Garden had four times more construction projects than Evergrande, the ripple effects of its default are expected to be significant. There are growing concerns that China's already sluggish real estate market will face a chain default crisis starting with Country Garden.

When reading articles about a company's financial difficulties and calculating the huge amounts of bond interest they owe, it can be hard to grasp the scale of the damage. However, seeing cases of construction workers who have not been paid for months and ordinary citizens on the brink of losing all their assets makes the pain of ordinary people caused by the real estate crisis tangible. The future of China's economy will likely hinge on how effectively the Chinese government can prevent a chain default among real estate developers.