Embattled Chinese real estate developer Country Garden warns of more bad news—a possible default—as China's economy teeters on the brink

Country Garden said that if its financial performance continues to deteriorate, the group might not be able to fulfill its debt obligations, “which may result in default,” according to a filing Wednesday. The developer also cited “material uncertainties” that may cast “significant doubt on the group’s ability to continue as a going concern.”

Once the country’s biggest developer by sales, Country Garden is in a debt spiral that threatens to be worse than rival China Evergrande Group because it has four times as many property projects. China’s property slump has escalated as consumers curb spending and many companies remain cut off from fresh financing to repay debt and complete construction.  

The housing slump adds to wider concerns about the world’s second-largest economy, where authorities remain reluctant to adopt stronger stimulus to reverse the slowdown. Signs of contagion from the housing woes have grown in recent weeks, from missed payments by one of China’s biggest shadow banks to a bond rout among Hong Kong developers.

Country Garden said it continues to negotiate with bond investors and banks to extend maturities to keep it afloat. The firm has missed interest payments on some dollar bonds and faces a series of key dates in coming weeks. Holders of a yuan bond are scheduled to vote this week on its plan to extend payment of a bond effectively due Sept. 4. The developer also faces the end of grace periods to pay a combined $22.5 million of dollar-note coupons in early September. 

Country Garden’s bonds are already trading at severely distressed levels, with a $1 billion note maturing in January trading at less than 13 cents on the dollar. It’s now a penny stock after shares plunged 67% this year in Hong Kong.

The developer’s results reflect the steep decline in China’s housing market. The Foshan-based company posted a net loss of 48.9 billion yuan ($6.72 billion) in the six months ended June 30, compared with a profit of 612 million yuan a year earlier. The developer earlier this month warned of a potential loss of as much as 55 billion yuan — the biggest since its 2007 listing in Hong Kong.

Even though revenue rose 39% for the period, losses mounted due to a decline in property sales volume and prices, and rising impairments for properties under development and on financial and contract assets, Country Garden said in the filing.

“The group’s liquidity is under unprecedented pressure with a dual tightening of sales and financing,” according to the filing.

Country Garden acknowledged that it didn’t adopt timely measures to deal with the slowdown, and failed to recognize the risks of its heavy reliance and lower-tier property markets.

“The profundity and persistence of the market’s downtrend still caught the company off guard,” the firm said.

Other key figures from the results:

• Revenue increased 39.4% from a year earlier to 226.3 billion yuan
• Core net loss, which adjusts for items including property revaluations, stood at 45.3 billion yuan, compared with core net profit of 4.9 billion yuan
• Total debts decreased to approximately 257.9 billion yuan, from 271.3 billion yuan as of Dec. 31. About 108 billion yuan is due in the next 12 months.
• Cash balance shrank to 130.6 billion yuan, including 29.5 billion yuan in restricted form

The company said in the statement that it will consider adopting various debt management measures to resolve the “phased liquidity pressure” to maintain stable operations and preserve value for investors. At the same time, Country Garden said it may be able to meet its financial obligations over the next 12 months, given anticipated cash inflows, cost controls and other plans and measures, including talks with creditors.

China’s property slump has been worsening anew, with new home sales falling the most in a year in July. The central government last week unveiled a further easing of its mortgage policies to halt the housing slowdown.

The country’s largest banks are preparing to cut interest rates on existing mortgages and deposits to shore up growth, people familiar with the matter said on Tuesday. Economists said the measures probably won’t be enough to shore up growth.