The property crisis in China extends to the economy

Once a beneficiary of China’s real estate boom, Lan Mingqiang is now an unwitting victim of its own disintegration.

Financial problems at a real estate company, Country Garden, have left him unable to pay the school fees for his son, who is starting seventh grade. Country Garden owes $21,000 to his company, which makes fences and billboards on construction sites. Now, with Country Garden days away from default, that money is more out of reach than ever.

“Nowadays, real estate is hard,” said Mr. Lan. He recently gave up work and left his family in the southern city of Chongqing to try to make a living selling snacks to tourists in the northern Chinese city of Zhengzhou.

Mr. Lan is just one in a long line of people waiting to get paid by Chinese property developers. The housing market, once the country’s largest source of jobs, has also enriched local governments and created a store of household wealth. But the move by regulators to deflate the real estate bubble and the slowdown in the Chinese economy has accelerated the crisis that is spreading across all life.

The small businesses and workers who thrived on the decades-old real estate boom are no longer getting paid. High on the developers’ redemption priority list, but an important part of the housing ecosystem, the group includes painters, cement makers and masons, as well as estate agents and companies that have outfitted the sales offices.

As a group, suppliers are awaiting at least $390bn in payments, according to Gavekal Research. This is a conservative estimate. The number may be greater.

People want their money and take action. Lawsuits and complaints to local authorities are piling up. Construction workers post protest signs at empty construction sites that have been restricted and closed. One sign reads: “It’s a shame that wages are delayed.” Another read: “Country Garden, give me back my hard-earned money.”

Liu Yaonan, a real estate agent in Guangdong, doesn’t have much confidence that Country Garden will ever pay. He only earned three-quarters of his usual commission for the past year and says he still owes about $8,000.

He said he has called the Country Garden complaints hotline over and over but the person who answers takes no action other than pointing out his complaint.

“It’s unfair for real estate agencies, because once a developer goes through a debt crisis, the system protects the buyers first,” Liu said. “Material dealers, agents and other engineers can’t get paid.”

The flurry of activity is adding pressure to the Chinese economy at a time when confidence is already low. Years of lockdowns and other coronavirus prevention measures have taken a toll on consumers, who are spending less. Companies have backed off from hiring. Fewer and fewer people are buying homes.

More than any other company, Country Garden and its sudden reversal in fortunes illustrate the gravity of these economic pressures. Just a year ago, it was China’s largest real estate company by sales, and one of the few private companies that suppliers and lenders could count on to pay the bills.

But declining sales over the past six months have pushed it over the edge, and in August it gave up on its hands.

Country Garden skipped two small interest payments on the bond, which pushed it to the brink of default. If you fail to make those payments by early September, when the grace period expires, you will join a long list of private companies that have defaulted on their debts. It is too a statement They may have lost as much as $7.6 billion during the first six months of the year.

Country Garden’s transition from success to near failure is deepening fears that an abrupt end is looming for developers in China, many of which have been under pressure for several years as regulators try to restrict their bank financing.

At first, some developers managed to keep going, even as they failed to deliver on their commitments. They have found other ways to compensate suppliers. China Evergrande, the corporate giant that defaulted on hundreds of billions of dollars in debt in 2021, has repaid some of its suppliers with unfinished apartments instead of cash, assuming the suppliers can sell them to recoup the money owed to them.

These days, even bartering is no longer an option.

“These apartments are sold out. “We can’t have it,” said Han Tao, a manager at a city landscaping company that received $1.4 million from real estate developers. For Mr. Han, apartments weren’t useful anyway; Nobody buys them now.

After years of building a thriving business supplying cherry and acacia trees for large real estate projects, he and his colleagues set more modest goals. One change: they will only accept the job if the money is paid upfront.

“We’re keeping our business small,” he said.

On Chinese social media platform Weibo, construction workers are complaining about not being paid. Some post photos of court documents from lawsuits. Others show records of complaints they have submitted to local authorities. Many express their feelings of hopelessness and frustration.

Liao Hongmei spent years in a legal battle trying to get $690,000 from China Evergrande. So she won. But Evergrande has yet to pay her, and in her view, companies her size will probably never get the money they are owed.

“We small suppliers don’t have a say,” said Ms. Liao, who set up a successful company a decade ago that provides marketing and decoration services for Evergrande for its sales offices in Jiangsu Province.

Flashy sales offices have long played a major role in bringing in the money real estate developers need to continue growing. Most of the companies sold the apartments before the completion of the project, as the clients paid in advance.

Inside sales offices, agents in suits usually pose potential buyers to bells and whistles. A scale model of the residential complex that gives an idea of ​​what the complex will look like when built. A tour of a typical apartment, often lavishly decorated, that sells it a lifestyle.

According to Ms. Liao, sometime around 2016, Evergrande began issuing commercial acceptance invoices — known in dry financial parlance as commercial acceptance invoices — for payment within six months. Then, in 2017, I started giving money for one year. The time it took Ms. Liao to get her paycheck became longer and longer. But she said the money kept flowing in until the company defaulted on its debt in 2021.

Now Mrs. Liao’s business is on the verge of bankruptcy. She sued Evergrande and won, but she has no way of getting her money back because the government is overseeing the company’s restructuring, and her first priority was to make sure Evergrande finishes the apartments she sold. She said last year she finished 300K and still is It was 720,000 More to complete according to his results for 2022.

On August 17, Evergrande filed for bankruptcy protection and indicated that it was close to reaching an agreement with some of its largest creditors. Trading in its Hong Kong shares resumed on Monday after a 17-month hiatus. The stock fell by 79 percent.

But for small business owners like Ms. Liao, who stands last in a long line of banks, creditors and companies looking for money, there is not much hope. She said many of her peers who have filed similar lawsuits have given up. Ms. Liao said she hopes that once Evergrande is done with the apartments it owes homebuyers, there will still be something left for people like her.

“A little money is her only request,” Ms. Liao said. “But it doesn’t look like that will happen.”

me you And Zhixu Wang Contribute to the research.