Blow for the Chinese economy. A known developer couldn't cope. The government stepped in

Country Garden, one of the largest Chinese developers, has been deemed insolvent in terms of dollar bonds. The giant did not pay interest on bonds during a 30-day grace period. The Chinese government does not want to allow the collapse of a key industry for GDP. It took extraordinary actions.

Country Garden failed to pay interest on bonds amounting to $15.4 million. This means that it did not take the last chance to avoid insolvency in relation to dollar bonds. The final deadline was exceeded last week, and the victims are the clients of Citicorp International Ltd.

Country Garden's insolvency is not a complete surprise, as the company warned last week that it would not be able to meet all obligations on time. The most likely consequence of the insolvency will be restructuring. The future of Country Garden may be determined by the creditors' attitudes. Today they have not yet demanded repayment of the entire capital.

Country Garden is not only one of the largest developers but one of the foundations of the Chinese economy. After all, the construction industry accounts for as much as 20 percent of China's gross domestic product.

So, it's no surprise that authorities in China take many actions to avoid insolvency in the industry - President Xi Jinping has decided to increase the budget deficit from 3 to 3.8 percent.

Changes of this type in the budget do not happen often. However, the scale of the problems that the Chinese construction sector is experiencing is so large that the amendment turned out to be necessary.

China intends to allocate substantial funds to rescue developers. The Chinese government plans to issue treasury bonds worth a trillion yuan every quarter. The money is also intended to combat the effects of natural disasters.

For years, the Chinese developer maintained the position of leader. However, unexpectedly in 2023, it fell to seventh place in terms of contract sales. It still leads 3000 housing projects, employing 70,000 people.

Other market giants are also in trouble. In August, Evergrande filed for bankruptcy protection in a US court. The most indebted developer in the world has become a symbol of the Chinese real estate crisis.

The collapse of Evergrande at the end of 2021 was the most spectacular event related to the bursting bubble in the Chinese real estate market. The problems of this sector are considered one of the main flashpoints of the entire Chinese economy, which has been increasingly struggling. The bankruptcy of Country Garden could be a much bigger blow to the Chinese economy, as there is a greater risk that it would start a real wave of similar bankruptcies.