China's heading for another real estate crisis — but it's on a whole different scale than what it's seen before

• Country Garden, a massive Chinese property developer, missed interest payments on two dollar bonds this week.
• "Any default would impact China's housing market more than Evergrande's collapse," an analyst said.

Two years after Evergrande's default triggered mayhem in the global markets, China's ailing property sector is teetering on the brink of another crisis.

On Tuesday, Country Garden, the country's biggest private-sector developer by sales, missed interest payments on two US-dollar-denominated bonds.

The company now has a 30-day grace period to avoid an official default.

On Wednesday, Kristy Hung, a Bloomberg Intelligence analyst, wrote: "Any default would impact China's housing market more than Evergrande's collapse as Country Garden has four times as many projects."

A debt crisis at Country Garden will have a far-reaching impact on China's housing market sentiment and could significantly weaken buyer confidence on solvent private developers, she added.

The developer built over 3,000 housing projects all across China. This compares to over 700 projects Evergrande has across China.

The size of the debt tells a different picture. Evergrande's total liabilities amounted to 2.4 trillion yuan, or about $333 billion last year. It eclipses Country Garden's debt which was $200 billion at the end of last year. However, it's the scale of Country Garden's projects that is a big warning signal for the Chinese real estate sector and the wider economy.

What is Country Garden?

Hong Kong Stock Exchange-listed Country Garden has been one of the few major private developers to side-step a default ever since a liquidity crisis plagued the Chinese property sector in 2021.

While Country Garden was the top developer by sales in China last year, it slipped to the fifth position in the first six months of 2023.

The company reported annual revenues of 430 billion yuan, or $60 billion, in 2022, down about 18% year-on-year, per the report. Moody's expects the developer revenues to drop to about $328 billion this year and to about $271 billion next year, according to a report released on Monday.

The developer employed about 70,000 people at the end of last year, according to its 2022 annual report. Over 60% of Country Garden's domestic projects are located in the Tier 3 and Tier 4 cities — typically having smaller populations — and about 26% are located in Tier 2 cities, per the report.

Country Garden was established in 1992 by farmer-turned-businessman Yang Guoqiang, per CNN. His daughter, Yang Huiyan, took over as chairman earlier this year.

The Foshan-based company's stocks have plunged by 20.4% since Monday. Investors are worried about the missed interest payments and the company's decision to scrap a plan to inject about $300 million into the business via a share placement.

The share price drop torpedoed the wealth of chairperson Yang, who was once Asia's wealthiest woman. Yang's net worth is now $5.5 billion, down 84% since June 2021, per Bloomberg's Billionaires Index. Her wealth tanked by about $490 million on Tuesday alone.

What's the debt problem at Country Garden?

Country Garden confirmed to Reuters it missed interest payments of about $22.5 million on two bonds that are due in February 2026 and August 2030.

The company had almost $200 billion in liabilities at the end of 2022.

State-owned media outlet Paper.cn reported Tuesday that Country Garden suffered temporary liquidity pressure and was seeking funds to resolve the debt crunch, citing an unnamed company source, per CNN's translation of the report.

Moody's even downgraded Country Garden's credit rating to B1 from Ba3 — meaning the debt is considered a risky investment.

"The developer's struggle to address even a modest coupon payment underscores the extent of its cash crunch," wrote Sandra Chow, the co-head of Asia-Pacific Research at CreditSights, per the New York Times.

How are the Country Garden and Evergrande problems different?

The two crises are different in that the number of Country Garden's projects dwarf that of Evergrande, and that the economy is now even worse off than it was three years ago.

Evergrande was once the country's second-largest developer by sales. The company fueled its growth largely through borrowings — at one time becoming the biggest dollar-debt holder among its peers.

Repaying that burgeoning debt became a herculean task. Evergrande faced a liquidity crisis in 2020, prodding it to try to halve its around $100 billion debt by mid-2023.

These efforts were scuppered by a slowdown in China's property sector and regulators' efforts to put brakes on property developers borrowing excessively. All these factors led to a default in late-2021.

But things are different now.

The Chinese economy is in deep trouble after years of on-off COVID-19 lockdowns. The country is trying to reverse years of crackdowns and boost its flagging economy with a round of economic stimulus aimed at boosting consumption rather than stimulating supply.

Even so, broader economic uncertainty, a record-high youth unemployment rate, and slower economic growth could dash revival hopes. Fewer people want to buy homes in this environment, and all these factors are compounding Country Garden's troubles.

Why does real estate matter so much in China?

China's real estate sector is so big that it makes up about 30% of its GDP, per a report Spain's Caixa Bank released in January 2022.

The country's property craze was largely fueled by debt — a double-edged sword, allowing the country's property developers to take huge borrowings to build apartments ahead of demand while increasing default risks, Insider's Huileng Tan reported on Monday.

Beijing has tried to temper this debt-fueled growth for years. In 2020, China introduced the so-called "three red lines" policy which tried to regulate debt ratios for property developers to keep the debt burdens in check.

However, putting the brakes on borrowing started sending the property sector into a crisis. Evergrande defaulted on a huge mountain of debt, which subsequently snowballed into a property crisis wherein other smaller developers began defaulting on their bond payments.

These sector-specific defaults also spurred concerns that trouble would spill into the Chinese domestic market — and even the world economy.

Country Garden did not respond to Insider's request for a comment.