China’s property sector financial woes ripple through wider economy with billions owed to businesses, workers

SHANGHAI: The financial woes of China’s largest property developers are rippling through the country’s economy, as lawsuits pile up with businesses and workers owed hundreds of billions in payment.

China’s ongoing property crisis was triggered by the government’s attempt to reform and de-leverage the sector to prevent a housing bubble.

Real estate forms the backbone of the country’s economy, contributing about 30 per cent of its gross domestic product (GDP), with some 80 per cent of residents' wealth locked in the sector.

China Evergrande Group, once the country’s top-selling developer, had filed for bankruptcy last month, while Country Garden – China’s largest real estate firm in terms of sales last year – narrowly avoided what would have been its first default.

Experts told CNA the sector is undergoing a long-term transition, as China has to wean its reliance on the sector given its shifting population trends.

RIPPLE EFFECT

Mr Chen Zhi Xiong had founded his own advertising and events planning company in 2019, and was approached by Evergrande for a business collaboration just a year later.

The 35-year-old worked with the real estate giant on four projects for three months from October to December 2020, providing billboards, publicity materials, and running promotional events for the firm.

“When I asked for payment, the company gave various excuses, saying it takes time to go through the due process (or) that they had no money,” Mr Chen told CNA, adding that payment was delayed for about a year.

He later filed a lawsuit, sending the company contract breach letters, notifications and payment reminders, according to court documents seen by CNA.

“I kept chasing them over the phone as well (but) they kept delaying payment,” he said.

Mr Chen used up his own funds for the unpaid projects amounting to US$100,000, and resorted to borrowing from various sources to balance his cash flow and pay suppliers and employees.

When Evergrande defaulted on payment, he too was unable to repay his own debt, and was forced to sell his family home and move to a rented apartment half the size of his original place.

He also had to downsize his firm by half.

When he went down to the Evergrande office physically to demand payment, he ended up being arrested by the police.

INTERNAL MARKETING CAMPAIGN

As a group, suppliers to China’s property developers are waiting on at least US$390 billion in payments, according to research firm Gavekal Research.

A former Evergrande employee told CNA that before the firm went into crisis, it had an internal policy for all staff, regardless of whether they were top, middle or entry-level executives.

“Employees may be required to buy an apartment from the company, or you have to recommend 50 clients to view a property. Essentially, it is an internal marketing campaign,” said the 27-year-old.

The ex-employee bought an apartment from Evergrande, putting in a 20 per cent down payment and taking up a 30-year mortgage.

He is currently still servicing his loan at a 5 per cent interest rate, which takes up a third of his monthly salary, even though the apartment he bought has already lost a fifth of its value.

“At that time the company couldn’t pay salaries and began to owe about three months of my salary,” he told CNA.

He added that Evergrande also had a wealth management product, which employees were required to deposit money into.

“For example, grassroots employees were required to deposit US$13,780, while middle and senior management executives may need to deposit more. The money can be redeemed after a year, but many employees around us were unable to withdraw it at all after one year was up. There was no money,” he said.

While CNA is unable to verify his claims, online databases have shown a long list of court cases filed against Evergrande and its subsidiaries regarding unpaid salaries and breaches of contracts. 

CHINESE ECONOMY UNRAVELLING

The reversal of fortunes of China’s top property developers is threatening to unravel the wider economy, as companies have pulled back on hiring with fewer people buying homes.

There are 1.5 million fewer jobs in the construction industry now compared to a year ago, according to data from the China Construction Industry Association in June this year.

“China had about 100,000 real estate developers before COVID in around 2019. And now the official figures show that more than 5,000 real estate developers have declared bankruptcy, and this process is still going on,” Hang Seng Bank chief economist Wang Dan told CNA.

The Chinese government has rolled out a series of stimulus measures, such as lowering mortgage rates and allowing banks to extend loans to developers.

However, suppliers, subcontractors, material dealers and agents are complaining of being left behind, as the system prioritises homebuyers seeking to get their incomplete homes delivered.

While government policy has accelerated the contraction of the sector, China’s housing market is also undergoing a long-term transition, according to experts.

The country can no longer rely on real estate to fuel growth, as its declining birth rate means that it no longer needs so many houses.

“China's fertility rate is at an all-time low. Now it is about 1.3, even lower than Japan, and the ageing is starting to accelerate,” said Mr Wang.

The trend has put pressure on pension payment and wage growth across the country, and there is still “a few more years to go” before China hits the peak of its urbanisation, he added.

The key for China is to open more investment channels and guide capital towards consumption and other industries, according to economists.

"China used to focus on the construction of new housing. But now that part is basically over. We have to focus more on the service in the real estate sector,” said Mr Wang.

“And the services are related to security, or to infrastructure such as the senior centers, kindergartens, or the maintenance of the environment. That investment has to be kept up and we will see a new model in a few years to come."