China’s too-big-to-fail property giants the tip of real estate crisis as ‘suppliers are being dragged to death’

“Now the debts are hanging in the air. Some big companies are too big to fail, but it’s leading to their suppliers being dragged to death.” Yao was quoted as saying.

Thirdly, the authorities must resolutely stop intervening in the market’s trades and falling home prices, Yao added.

In a research report on Thursday (Aug 31), Gavekal Dragonomics said: “In the financial sector, moral-hazard constraints explain why regulators have not bailed out struggling developers, and will probably not fully compensate investor losses on high-risk investment products, following years of warnings.”

Fitch Rating says the outlook for Chinese developers is “deteriorating”, citing a lack of improvement in private developers’ funding access and weak homebuyer sentiment. However, it says the outlook for many state-owned developers is stable.

“Sales of most distressed developers are unlikely to stabilise in the next few years, while pressure on overall sales may persist without an aggressive policy response,” analysts Lan Wang and Duncan Innes-Ker wrote in a credit brief last week.

Peter Berezin, a global investment strategist at BCA Research in Canada, warned that the Chinese housing market looks even worse than Japan’s market in the early 1990s.

“In terms of leverage associated with the property developers, China looks worse. In terms of the prospect of a demographic decline, China looks abysmal,” he said. “And so, the question then is what does China do to fill that hole in spending that the housing market occupied? It was the same question that Japan faced in the early 1990s, and they didn’t have a good answer.”

In the first seven months after China ended its strict COVID-19 restriction, Country Garden’s sales fell by 35 per cent, year on year, and the operating cash flow dried up.

Behind the private giants are dozens or even hundreds of smaller private firms that have also been dragged into the debt crisis. But local authorities cannot provide additional funding because of their sluggish fiscal revenue seen during the pandemic.

“It is actually even more difficult for us to get the arrears,” said Raymond Zheng, another supplier, “because many of the contracts signed with Evergrande are overturned and disapproved by local governments.”

Despite Beijing having vowed to ensure timely payments to small and private firms, those payments owed by Evergrande have been made exceptions, after the government stepped in to solve its crisis.

Zheng, who is also in the piling business, has similarly seen his fortune plunge amid the property crisis.

To make matters worse, his credit standing took a hit because he defaulted on payments to third parties, meaning he is now restricted from borrowing money, using a credit card or even buying an air ticket, according to China’s social credit system.

“I used to be a successful, private entrepreneur,” Zheng said. “But now I’m making preparations for the worst – going bankrupt personally and corporately.”

Meanwhile, as many homebuyers remain anxious about the delivery of their pre-bought properties, Beijing’s actions in ensuring prompt delivery times seem to be paying off.

In the first half of this year, the top-50 Chinese developers completed and delivered more than 2.02 million pre-sold homes, state media reported last month.

Country Garden said that the firm delivered 700,000 pre-sold housing units last year and planned to complete another 700,000 units this year. It delivered 278,000 units in the first half of the year, according to its statement in July.

But the two piling entrepreneurs, Zheng and Ye, expressed doubts that the newly introduced policies will have a practical effect, and they were concerned that enforcement and governance are fraught with arbitrariness on the ground.

“So, how can the authorities bring certainty to investors and the market,” Ye asked.

They fear that, if the Country Garden crisis deepens, it could strike a big blow to market confidence and debt chains among the country’s developers and their suppliers.

“There is a serious surplus of houses, especially in fourth- and fifth-tier cities. Besides, everything is unknowable ahead, like how much property prices will fall, in which direction policies will change, and whether the business environment for private companies will continue to deteriorate,” Ye said.

China Real Estate News, a newspaper afflicted with the Ministry of Housing and Urban-Rural Development, ran an op-ed piece on Aug 20 saying that local stimulus measures had failed to yield obvious results because core issues concerning supply and demand had not been addressed.

“The financing environment of private developers has not substantially improved. A large number of those who already reported defaults are now still struggling, while many others are also gradually slipping to the edge of risk due to the market deterioration,” it warned.

Meanwhile, the state-run publication warned that market expectations are unstable – with household consumption weakening while restrictions in purchases, loans, and prices in some cities remain strict.

“The policy support should start with ensuring the cash flow of developers and their deliveries of pre-sold units; the relaxation of administrative interventions; and the lowering of home-buying costs, including down payments, taxes and sales prices,” it added.

This article was first published on SCMP.