Another Chinese real estate giant is facing a creditor who wants it dismantled

Country Garden, China’s biggest real estate developer in 2022, said on Wednesday that a creditor had asked a Hong Kong court to liquidate its operations and pay off lenders, in the latest sign that China’s housing crisis continues unabated.

Ever Credit Ltd., a Hong Kong lender, has petitioned the city’s High Court to close Country Garden. The lawsuit concerns Country Garden’s inability to repay a $204 million loan plus interest owed to Ever Credit, the property developer told the Hong Kong stock market.

Ever Credit’s petition, known as a liquidation petition, aims to force Country Garden to close its doors and sell its assets to earn money it can use to pay back its creditors. The move follows a Supreme Court order last month for the liquidation of China Evergrande. Country Garden dethroned Evergrande as China’s largest developer in 2021 as Evergrande suffered a financial collapse.

Country Garden said it would “vigorously” fight the court’s petition and that the first hearing on the petition was scheduled for May 17.

More than fifty Chinese property developers have defaulted on their debt payments since 2021. They have refused to repay foreign creditors, while they are still making arrangements with Chinese banks for a possible eventual repayment.

Many of these developers have listed shares on the Hong Kong stock market or borrowed there, or both. But creditors face huge obstacles in recovering loans from Chinese real estate developers through petitions in Hong Kong courts, said Zerlina Zeng, head of East Asia corporate lending at CreditSights, a global credit research firm.

Most assets of Chinese developers are in mainland China, where courts may not recognize liquidation orders from Hong Kong. Even if mainland courts order liquidation sales of developers’ buildings, China’s increasingly tight restrictions on moving money out of the mainland could make it difficult for creditors to get their hands on the proceeds from those sales.

“We do not believe the liquidation order will succeed in improving the debt repayment recovery rate,” Ms Zeng said.

Country Garden essentially ran out of money to pay off debt last October. Households in China have sharply cut back on apartment purchases from private developers such as Country Garden as house prices have fallen sharply in the past two years.

Without cash from continued sales, developers have failed to complete construction of millions of apartments they pre-sold to buyers across China. Japan’s Nomura Securities estimated last month that 20 million presold homes in China were awaiting completion and that $450 billion would be needed to complete them.

China’s real estate developers relied for years on selling apartments before they were built, then using the money to finish other apartments that had previously been promised to other buyers. But that financial model has fallen apart as households have shied away from dealing with private sector developers who have had trouble completing previous deals.

Country Garden’s pre-sales of unfinished apartments fell 74 percent in the second half of last year compared to the same period in 2022. And the problems for China’s real estate sector are getting even worse this year, with preliminary data showing sales has fallen by another 40 percent. Lunar New Year earlier this month compared to the same holiday last year.

Mainland China is not the only one currently having problems with the real estate sector; these have also spread to Hong Kong. Paul Chan, the city’s financial secretary, said in his annual budget speech on Wednesday that he would withdraw measures previously aimed at curbing apartment speculation in Hong Kong.