Some Chinese state property developers stiff their suppliers, defying edicts and worsening slump

For two years, Richard Zhang has travelled to Shenzhen every few months. It is a trip many make, usually to spend leisure time in the gleaming metropolis, built in decades and a monument to China’s rapid development. But he is no tourist. He has travelled across Guangdong province from the capital of Guangzhou to demand a state-backed construction and development firm pay what he is owed. He performed subcontracting work for a middle school in the city’s Bao’an district, a project that was a major government priority. “Construction completed in 2019, and the school started enrolment in 2021,” he said. “But we still haven’t got the final payment. I have advanced funds [from the firm’s capital] to pay workers’ wages and other expenses.” Chinese economic regulators have been putting heavy pressure on state-owned enterprises (SOEs) to pay their small suppliers, largely private firms, on time. But Zhang and Tony Lu, co-founder of a construction company, are running out of patience. Delays have been so extensive and harmful to his business that Lu’s firm may have to file a lawsuit against a developer next year. He said he is left with no other choice, as he finds himself on the brink of bankruptcy. Payment arrears are a chronic problem in China, but the situation has become more pressing this year as the economy languishes in a fragile state. In particular, the private sector – generally relied upon to prop up growth and create jobs – has yet to return to full fitness. Despite the government’s stern warnings, Lu and many of his subcontractor peers in Zhuhai have found themselves disappointed, as developers have crafted new ways to circumvent payment requirements. We’ve already run out of capital funds for payroll. [Why do] we have [to give] more money to the developer? Tony Lu, Zhuhai “More than 10 subcontractors for this project did not get their payment, including those installing air conditioning, building foundations and laying bricks,” Zhang said of the middle school. “The company would only say they have to go through an internal process, which would take several years.” Lu said one developer has come up with a sly workaround: offer suppliers flats for just a down payment, around one million yuan (US$139,684) per unit. Then, theoretically, the flats could be sold at a profit. But with a laggard property market that has seen steadily falling prices and a drought of buyers, doing this means a loss of 4,000 yuan per square metre at current market conditions, Lu said. “We’ve already run out of capital funds for payroll,” he added. “[Why do] we have [to give] more money to the developer? It turned out this [was used] to further delay payment.” What is “more outrageous”, he said, is that this process has become an unspoken prerequisite for subcontractors to increase their odds of winning contracts from the developer in the future. Local authorities also admitted difficulties in solving the problem, particularly when it comes to construction. According to a document seen by the Post, the economic authority of a major city in south China acknowledged a significant rise in account balances owed to private companies by state players, which has led to a “severe tightness in corporate funds”. Even worse, officials admitted, some big companies “maliciously delayed payment” and “leveraged their dominant position in the market, either refusing to sign contracts or declining to conduct acceptance checks of construction work.” China heads off ‘triangular debt’ quagmire with demands for state repayments The regulator also said a lack of statistics on the private sector has led to inaccurate assessments, an information gap that has only been somewhat ameliorated by the results of regional audits in September. In the central province of Henan, an estimated 9.56 billion yuan in overdue payments to small- and medium-sized private firms was found to be owed by local governments and SOEs. Meanwhile, in the more prosperous eastern province of Jiangsu, the local audit office said 12 cities were in default to the tune of 1.62 billion yuan. That balance was owed to private firms for 562 construction and government procurement projects. The Inner Mongolia autonomous region, which has been struggling with a hefty debt burden, said in the same month it would issue 66.32 billion yuan in special refinancing bonds, with the proceeds used to settle overdue corporate debt. Jay Wang, a privately employed subcontractor for state-owned electricity suppliers and property developers, also noted difficulties the private sector faces in obtaining orders. “Qualified private enterprises used to be able to bid for state-invested projects, but now private enterprises can only obtain projects through multiple layers of subcontractors, who are also subordinated state-owned enterprises,” he said. “It resulted in a significant decline in the income of private enterprises.” The investment capacity of the private sector has, consequently, been considerably constrained. Fixed-asset investment from the private sector fell 0.5 per cent from the year prior in the first 11 months of 2023, and overall property investment was down 9.4 per cent in the same period. According to a report released by Bank of China, the average recovery period for accounts receivable in private industrial enterprises rose to 64.2 days in August 2023 from 43.6 days at the end of 2019, while the average recovery period for their state-owned counterparts rose by about five days during the same timespan. We found there is almost no essential difference in the wording [of policies], but the economic situation has changed a lot Peter Qiu Government action has been extensive, but results have been mixed. Peter Qiu, founder of the Centre for Globalisation Hong Kong think tank, said at a forum in Guangzhou in early December that China has introduced 131 measures to support private enterprises over the past 18 years. “With the help of ChatGPT for a bit of research, we found there is almost no essential difference in the wording [of the policies], but the economic situation has changed a lot,” he said. Li Mingbo, deputy dean of the Guangzhou Institute of the Greater Bay Area, said at the same forum that private entrepreneurs as a whole still lack confidence. “The current policies have not addressed some issues that private entrepreneurs are most concerned about,” said Li.