BEIJING (BLOOMBERG) – The defaults and slow-moving crises of companies in China’s property sector is not just hurting bond-holders and people waiting for their apartments – thousands of small suppliers of everything from tiles to cleaning services are also waiting to get paid by the likes of China Evergrande Group.
Mr Feng Guoxun’s company is one such supplier.
The 36-year-old says his advertising company is owed US$200,000 (S$273,000) by property developers including Evergrande, with those unpaid debts pushing him to the brink of bankruptcy. Mr Feng said he is still waiting for the 489,500 yuan (S$105,000) that the troubled developer – once the country’s biggest – has owed him since August.
He also claims Guangzhou R&F Properties, another major developer, has owed him around 800,000 yuan in payments for two years, and last month posted photos on Weibo of the contracts he signed with R&F and commercial acceptance bills Evergrande gave him in 2020 instead of immediate payment.
“It’s an unimaginable number for us,” said Mr Feng, whose company Shijiazhuang Kaichen Advertising was profitable until the pandemic hit in 2020 but has now lost all its staff. “If I can’t get my money back, I’ll have gone through all these years of hardship for nothing.”
Mr Feng supplied photos of the work his firm did for both companies and a photo of a filing from his suit against Evergrande. Bloomberg News could not independently verify the authenticity of the documents. Evergrande and R&F Properties did not respond to a request for comment on the allegations.
Many small firms now find themselves in a situation similar to Mr Feng’s as the housing market slump cripples developers’ ability to pay suppliers and vendors in industries from furniture to construction. On top of that, a series of sporadic virus outbreaks, surging raw material costs, regulatory crackdowns and supply chain bottlenecks have hurt many companies’ profitability.
Late payments to small companies or paying for services with commercial acceptance bills instead of cash is such an issue that China’s Cabinet recently vowed to crack down on it. Many highly indebted developers pay suppliers only with the bills, which are a kind of IOU, and have now stopped repaying these amid an industry-wide liquidity crunch. Evergrande was estimated to have more than 200 billion yuan of outstanding bills at the end of last year, according to Central Wealth Securities Investment.
“Evergrande’s problems are not just one company’s problem, but the problems of tens of thousands of small businesses that supply it,” said Mr Sun Wenkai, deputy director of the National Small and Medium Enterprise Research Institute at Renmin University in Beijing. “Small companies don’t have the power to set prices and they suffer from higher costs, so they are squeezed at both ends.”
The problems facing small business will reverberate across the broader economy, potentially making firms slow down hiring and spending. Combined with still-weak retail sales which have never recovered pre-pandemic levels of growth, it is yet another factor putting downward pressure on growth.
Hits from Covid-19
China’s stringent Covid Zero policy has basically eliminated the risk of large outbreaks and kept illness and death at very low levels, but many small businesses have borne the brunt of sudden lockdowns and restrictions which have reduced travel and spending.
Ms Sofie Li, who sells fruit in the south-western city of Chongqing, watched more than 70,000 yuan worth of fruit rot after the government shut the Shuangfu market for a week in July. The shutdown came after two cases of the Delta virus variant were found in the district.
That loss was half her annual profit. Ms Li’s savings have now run out and she is unsure whether she could survive another closure if Covid-19 cases surge again. For now, she is looking for a part-time job and continuing to sell fruit.
The authorities have rolled out a string of measures to help smaller businesses in recent months, including encouraging banks to provide cheaper loans and extending the deadlines for tax payment. That effort underscores their dire situation and indicates the importance of small businesses to the economy, as they make up more than 60 per cent of China’s gross domestic product and more than 80 per cent of jobs.
However, signs of stress are everywhere. Business sentiment among small firms in the property industry has declined for seven straight months, while overall confidence in October fell to the lowest level since May 2020, according to a survey of 3,000 smaller companies by the China Association of Small and Medium Enterprises.
Strains are also showing in the labour market. State-owned enterprises accounted for 13.5 per cent of all new hiring in October, spiking from around 8 per cent the year before, data from consultancy Business Big Data shows. A rise in this ratio in the past has usually coincided with larger downward pressure on growth and a worsening business environment for smaller companies, according to Mr Chen Qin, chief economist at BBD.
Mr Feng was not able to get any bank loans to help his company survive. He recently sold his electric SUV and took on more than 100,000 yuan in credit card debt to pay wages to his eight employees, all of whom have now left the company.
“After I get my money back, I will definitely just close shop,” said Mr Feng, who has started the process to sue the two developers. “I’m old and I’ve lost the confidence to become an entrepreneur again.”
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