China’s mum and dad investors, small businesses and employees are being cut loose. As Beijing grapples with how to revive the nation’s flatlining economy, they’re being left to carry the bills left by collapsing megacorporations.
Property developers Evergande and Country Garden owe suppliers, builders, contractors and employees billions of dollars. Not to mention homebuyers who pre-bought units and housing before they were completed.
They’re at the bottom of the capital food chain.
Some are being cut loose.
“Suppliers are being dragged to death,” blares the headline of the Communist Party-controlled South China Morning Post. “Unpaid workers, investors and suppliers are angrily clamouring for tens of millions owed to them – showing how the crisis has trickled down and hit the entire industry.”
It’s a rare sign of discontent amid Beijing’s normally tightly controlled messaging.
Country Garden – China’s biggest property developer – this week announced a six-month loss of $A10.8 billion. It warned this “may result in default” on debt repayments and expressed “material uncertainties” leading to “significant doubt on the group’s ability to continue as a going concern”.
That’s terrible news for its billionaire owners and Party commissars.
But it’s even worse for the hundreds of thousands relying on the megacorps to pay their bills and complete their products.
“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.” says the dean of Peking University’s National School of Development, Yao Yang.
Meanwhile, China’s provincial governments have begun making “exceptions” on invoice payment requirements. That means suppliers and workers aren’t getting paid. And they’re unable to pay their own bills – causing them to fall foul of Beijing’s strict “social credit” citizenship scoring system.
“There is confusion and, as long as there is confusion, then there’s lack of credibility. And that means investors are more likely to stay away,” strategist Seema Shah at Principal Global Investors told Asia Times. “The only way out is to step up fiscal stimulus.”
Home or investment?
The roots of the current crisis date back to 2017. That’s when Chairman Xi Jinping proclaimed, “Houses are for living in, not for investor speculation”.
It was a noble sentiment.
It’s similar to the debate in Australia with its soaring house prices and unaffordable rents.
But, where Australia’s crisis is due to a lack of new construction, in China, it came amid an unprecedented building boom. Chinese families were rushing to invest their savings in massive new development projects to cash in on rampant excitement and growth.
Xi moved to cool off the property boom by introducing new credit rules to restrain speculation. It worked. Too well.
The highly speculative property developer Evergande defaulted in 2021, dragging down hundreds of thousands of investors and contractors under $511 billion worth of liabilities.
“Unlike local government financing vehicles – with their debt owed to state-owned banks and middle-class investors through a variety of wealth-management products – the crisis in the property sector is particularly urgent because it involves so many households nationwide,” notes the SCMP.
Last year, Evergrande promised to deliver 600,000 new homes – almost half of its outstanding pre-sold obligations. But it only completed about 300,000.
Xi handballed the property portfolio to his new Premier, Li Keqiang, in March.
Shortly after, China’s central injected an additional $44 billion into Evergrande’s books to complete the remainder.
“Special teams have been dispatched by Beijing and local authorities to oversee the process,” the Hong Kong-based news service states.
But the move has so far failed to allay public fears.
“With no light seen at the end of the tunnel two years after Evergrande’s debt crisis unfolded, analysts warn that Beijing needs to take immediate actions – or perhaps a different approach entirely – to prevent contagion and spillover fears,” it adds.
Bazooka economics
The Country Garden crisis threatens to be far worse than that afflicting its rival Evergrande. It has four times as many property projects. And its debt spiral will affect a much broader segment of China’s population.
But, amid it all, Beijing appears reluctant to inject any significant stimulus into the economy.
And that’s despite collapsing consumer confidence and missed debt repayments from one of its biggest “shadow” investor banks.
That’s not to say nothing is being done.
Mortgage policy requirements have been eased. Stamp duty cut. Share buyback schemes are being encouraged. And the country’s largest banks have been instructed to cut interest rates on existing loans.
And the troubled Zhongrong International Trust shadow bank appears set to be propped up by a cash injection from Beijing.
“Xi’s economic team is prodding banks to add liquidity around the margins rather than fire its stimulus bazooka again,” Asia Times analyst William Pesek states. “By cutting rates on the nation’s 38.6 trillion yuan (A$8.3 trillion) of outstanding mortgages, Beijing is looking to support growth with less fanfare.”
But CEO of Port Shelter Investment Management Richard Harris writes in the Communist Party-controlled South China Morning Post that he “would bet” on Beijing rolling out a “big bazooka”.
“Trying to manufacture confidence is like pushing on a piece of string,” he writes. “It takes time and money to move the psychology from the Covid-19 lockdown years when people needed to save and not spend. Unfortunately, tinkering around the edges spends the ammunition of the economic authorities and is quickly swamped by the gathering gloom.”
It’s up to Beijing to pick up the tab for China’s failed entrepreneurs, he adds.
“The alternative is that the authorities decide to fire the “big bazooka” and inject liquidity, as has been successful in the West. This would pump-prime the economy through one-off, shocking, but substantial measures.
“Investors must take the probabilities of what they think the mainland economic authorities will do and turn those into a deterministic decision: whether to buy now or hold off. My bet is that the authorities will finally move to reflation.”