Two years after Evergrande defaulted on its massive debt, another struggling Chinese property developer may be about to fail.

Country Garden is China’s largest privately run developer, yet it told investors last month that it is facing problems that “cast significant doubt on [its] ability to continue as a going concern.”

Such problems include a loss of RMB 51.5 billion ($7 billion) in the six months to June 2023 and the equivalent of $186 billion in liabilities. According to the Wall Street Journal, most of these obligations are due within 12 months.

With the property developer already having been late with two interest payments earlier this month, its troubles are getting larger and closer.

Like almost every massive company in China, the performance of Country Garden is a barometer for the rest of the economy.

Downtrodden Chinese property market points to slowing economy

The underlying problem for Country Garden is that it continues to struggle within a Chinese economic slowdown.

The developer’s own note to investors acknowledged a fall in China’s property market. In the first half of 2023, it declined by 5.3% annually, with investment in property development sliding by 7.9% year-on-year.

While Country Garden’s revenues were actually up in the first half on an annual basis, it admitted to striking “a balance between sales volume and selling price at some of its property projects,” implying that it is also falling victim to declining Chinese property values.

Property prices are declining largely because of the current state of the Chinese economy, which is suffering record youth unemployment levels, a decline in GDP growth, and a tumbling stock market, among other things.

China is experiencing other potential crises: financial services provider Zhongrong International Trust—which has $108 billion in assets under management—also faces possible collapse, having missed payment deadlines over the past month.

What’s most concerning about China’s apparent slowdown isn’t simply that its economic growth is stalling. According to analysts, the current downturn suggests China’s former glory days were never really sustainable to begin with.

In fact, some economists and experts had been sounding alarm bells for well over a decade.

This includes Yu Yongding, a former member of the People’s Bank of China’s monetary policy committee, who in a 2010 opinion piece for China Daily suggested that the country’s rapid growth had been achieved at “an extremely high cost.”

“[China’s] growth pattern has now almost exhausted its potential. So China has reached a crucial juncture: without painful structural adjustments the momentum of its economic growth could suddenly be lost,” Yu wrote.

Kicking the can

Country Garden has benefited from help in previous months thanks to creditors extending payment deadlines, and the Chinese government making it easier for people to buy homes.

Yet it’s possible that this all amounts to kicking the can down the road, and that Country Garden could end up defaulting, as Evergrande did in December 2021.

Evergrande’s default had global knock-on effects, with the S&P 500 dropping from a record-high of 4,796 at the end of 2021 to 3,674 by June 2022.

It’s not just the S&P 500 that’s at risk from China’s rocky situation.

As the world’s second-largest economy, China exerts a gravitational pull on global markets. Everything from the value of its currency to the government’s trade policies impact global investments.

“No one can live with China instability,” says Zhou Ping, founder of Bin Yuan Capital Ltd., which manages assets on behalf of U.S. pension funds.

Ping’s comments point to China being intertwined with global finance—something the Fed has even acknowledged in its own research.

A November 2022 Fed paper found “evidence that China constitutes an important driver of the global financial cycle,” especially in terms of consumption and credit.

If China’s property slowdown worsens and impacts the broader economy, it’s expected that everything from commodity prices to Apple shares will be affected due to waning Chinese demand.

Investors with exposure to MSCI’s Emerging Market Index—a popular stock market gauge for 401(k) holders—could see direct effects. That’s because Chinese companies comprise roughly 30% of the index.

The end of China’s “economic miracle” won’t be some isolated event, but a paradigm shift with long-lasting implications.