Embattled Chinese developer Country Garden reported a 48.9bn yuan ($6.7bn) loss for the first half of the year in a stock exchange filing on Wednesday, adding to worries of a potentially catastrophic default.

Its tenuous state has sparked fears of a collapse that could have far-reaching consequences for the Chinese financial system two years after the fall of Evergrande.

Country Garden, which was China’s largest real estate firm last year, has four times as many building projects underway as Evergrande. When the latter halted construction projects in recent times it infuriated home buyers, who held demonstrations and stopped making mortgage payments in protest.

Evergrande, the world’s most indebted property firm with liabilities of $328bn, has lost more than 99% of its share market value over the past three years. The company resumed trading on the Hong Kong stock exchange on Monday after a 17-month suspension that Evergrande used to try to restructure its offshore debt.

One of China’s biggest builders, Country Garden has racked up debts of more than $150bn and said this month it had failed to make interest payments on two loans.

It is one of the few major homebuilders to have avoided default since Beijing introduced a “three red lines” policy in 2020 that aimed to reduce debt levels in the highly leveraged sector. The red lines set limits on liabilities-to-asset ratios and ensure companies hold cash reserves equivalent to at least 100% of short-term debt.

The group warned on Wednesday that if its financial performance “continues to deteriorate” it faces possible default.

If Country Garden does not meet a deadline for a bond payment at the beginning of September, it could become the biggest Chinese real estate firm to crash since Evergrande in 2021.

The company’s cashflow problems have fuelled fears that it could spread turbulence through China’s economy and financial system.

The rise of the world’s second-largest economy has been largely founded on property and construction, which account for about a quarter of China’s GDP.

Country Garden’s losses from January to June were on par with estimates it made in early August of 45-55bn yuan.

Over the same period a year ago, the group posted a small profit of 612m yuan.

“The shrinkage of the property sector, coupled with the not yet restored confidence of the capital market, exerted mounting pressure on the company’s business operation,” Country Garden said in its filing to the Hong Kong stock exchange.

It added that it will “Try its best to improve its operating cash flow by ensuring good sales performance, strive to revitalise under-performing assets and reducing inessential administrative expenses”.

The earnings report came out as Country Garden is negotiating with creditors to reschedule debt payments so as to avert default.

A vote by bondholders on extending repayment terms was to have been held on Friday last week but was postponed, Bloomberg reported.

Country Garden on Wednesday also proposed issuing new stock worth 255m yuan.

The company has “tried its best” to make debt principal and interest payments, it said in the latest filing.

Country Garden provides work for tens of thousands of people and is ranked by Forbes among the world’s 500 largest companies.

Its boss, Yang Huiyan, was until recently the richest woman in Asia.

The woes of Country Garden and Evergrande are causing further weakness to a property sector hit hard by the pandemic and China’s economic slowdown.

These problems also discourage potential homebuyers, which could pile pressure on other real estate firms.

In a sign of the market’s weakness, home prices in July fell at the quickest pace in a year, according to government figures.

Authorities are making moves to boost the key sector now, with major cities Guangzhou and Shenzhen taking steps to ease mortgage rules.

Source |  Agence France-Presse