As Chinese company Evergrande is on the brink of collapse, its debts spur protests

Shenzhen, China –

They came from all over the country, dragging cheap suitcases and clutching files filled with records, chanting in front of the glassy skyscraper: “Evergrande, pay!

They were owners of small lighting, plumbing and building materials companies, suppliers to Evergrande, one of China’s largest real estate developers – with over $ 300 billion in debt and potential collapse.

Dozens of protesters have gathered here daily in recent days at the Evergrande headquarters. Most were entrepreneurs who had accepted commercial papers – a kind of IOU – as payment for projects, but now found Evergrande unable to pay when those IOUs came due.

“They say, ‘We have no money. Do whatever you want, ”said Li Gexin, director of a concierge company in Qingdao. It had 200 employees who had cleaned Evergrande’s sales offices for a year and owed more than $ 300,000 in commercial papers.

“If we don’t get the money, we can’t eat,” said Li, who had driven for 24 hours to the headquarters in Shenzhen. They needed the money to feed their families, send their children to school, buy medicine for the elderly and pay their own mortgages – to live, he said. Dozens of other vendors have gathered around, recounting similar woes.

Legions of police wearing riot shields stood nearby. Some walked through the crowd with banners that read “Gather Evidence” and took photos of each person’s face.

The distress surrounding the Evergrande crash is a window into the bad debt problem in China’s housing sector. Real estate giants like Evergrande have exploded over the past few decades on a model of vast borrowing and rapid expansion, relying on cash flow from the apartments he would one day build to build apartments he would one day build. had already sold.

It worked as long as they could keep getting new loans for new projects even as the demand for housing declined. But in August 2020, government regulators established new rules on how much debt developers could shoulder.

After a year of struggling to reduce liabilities amid declining sales, Evergrande admitted in public statements this month that he may not be able to repay debts. The rating agencies Fitch, Moody’s and S&P have lowered Evergrande to levels indicating “in default or very close to default”. The value of its inventory has fallen 80% this year and it has around 1.4 million additional homes already sold but not yet built.

While the government is likely to step in to limit the fallout, “the Evergrande collapse would be the biggest test the Chinese financial system has faced in years,” said Mark Williams, chief Asia economist at Capital. Economics, in an analysis this month.

This would not only harm the developer’s creditors and investors, but also anyone who bought unfinished homes, placed their savings in Evergrande’s wealth management products, or were among its contractors and subcontractors paid in recognition. of debt.

Some of these providers had set up their own homes as collateral for loans to cover their work for Evergrande, believing that “such a large company” could not fail to pay. Now they are under pressure from the banks and their workers.

The entire construction supply chain had used Evergrande IOUs instead of cash for years, said Cai, a supplier from Wenzhou who asked to be identified only by his last name.

When Evergrande paid the July commercial papers late, she assumed that if the project she had been working on was in trouble, the company would be able to transfer money from another Evergrande project.

“We figured it couldn’t be that all of their projects across the country were strapped for cash. It’s not realistic, right? she said. But suddenly, no one wanted Evergrande’s IOUs anymore. They had become “worthless pieces of paper,” she said. “Then we panicked. “

At headquarters, police gathered protesters towards a cafeteria on the fifth floor of a nearby building. There, Evergrande’s staff sat scattered across orange plastic tables with the names of each province on them. Suppliers were encouraged to register their complaints with staff, and then promised that they could receive Evergrande properties – unsold apartments, storefronts, or parking spaces – at a discounted price to make up for what the company owed them.

Chen Xiaowang, owner of a lighting and electronics company in Wenzhou, sat at the table in Shaanxi Province. Evergrande’s branch in Xi’an owed him more than $ 200,000, he said. He had already had to lay off half of his workers. The other day, the staff told him that he could get parking spaces in Xi’an, but when he called the office there, the workers told him that they had not received one. ‘instructions on this from their superiors.

Hours later, he received a call from Wenzhou local police, he said, showing the Times the tapes of the calls. They told him to go home and stop “causing trouble” in Shenzhen.

“It’s not the right way to do it,” Chen said.

Outside, several women were sitting against the wall on suitcases and pieces of cardboard. They had been here for four days, staying in budget hostels and eating a bowl of noodles a day.

Even though the parking spaces and retail spaces were real, one of the women said, no one wanted them. Her name was Li and had supplied decorative materials for Evergrande in Anhui Province. They owed her over a million dollars, she said.

“We already have four parking spaces in Evergrande,” Li said.

Another woman, a construction manager from Shandong who requested that her name not be used, agreed. He was owed over $ 300,000, and dozens of migrant workers were awaiting payment at home. “I owe this worker $ 1,500 and this worker $ 750. Should I give them each a brick? A toilet? A play?”

Analysts expect Chinese authorities to take action to limit damage to the economy if Evergrande defaults. The potential for social and financial instability would be too high as the Communist Party prepares for Xi Jinping’s transition to his third term next year.

“The most likely final phase is now a managed restructuring in which other developers take over the unfinished projects of Evergrande in exchange for a share of its land bank,” and in which the central bank of China intervenes with support in cash, Williams said. Homebuyers would likely be prioritized in this scenario, he said.

It is less clear what would happen to people who came to collect their money in Shenzhen.

“They are sacrificing a group of people to save the majority,” said Ye Hong, 55, a clothing exporter from Ningbo who had invested his retirement savings of nearly $ 800,000 in the now frozen wealth management products. ‘Evergrande.

Ye had come to Shenzhen for the first time in his life hoping to recoup his investment. But after trying to negotiate, seeing the police everywhere, and hearing how much the others were owed, he had no hope.

“I trust them too much,” he said.

Ziyu Yang of the Times Beijing office helped research this report.