China property developers’ struggles make waves that threaten to swamp upstream and downstream suppliers

Lily Gao, a designer in an architectural firm in Shanghai, never thought that the news about defaulting property developers and mortgage boycotts would affect her life.

“I thought that since I did not even buy a home or invest in any of the wealth management products, those news stories were just other people’s desperate stories,” the 27-year-old said. “Apparently, I was too naive.”

Now, the distressed property market could end up costing Gao about 90,000 yuan (US$13,000).

“We were told that our bonus this year could get delayed or cancelled if the receivables cannot be settled,” the designer said with disappointment.

Losing the bonus, which usually accounts for 30 per cent of Gao’s total compensation, would force her to call off her plan to buy a car.

Gao’s situation illustrates how, as property developers struggle to keep their heads above water, they create waves that upset personal plans – and corporate profit expectations – throughout the property ecosystem and beyond.

For example, leading US-based lift maker Otis Worldwide saw its sales in China plunge 11.5 per cent year over year in the second quarter, dragging its net sales down by 5.8 per cent – its worst quarterly performance since going public in 2020.

While Otis management cited China’s on-and-off Covid-19 lockdowns for the drop, analysts are more concerned about a lasting slowdown, because “housing inventory levels are alarmingly high and sales of new floor space are cratering”, as analyst Joel Spungin of Berenberg Capital Markets put it on an earnings call recently.

While foreign firms have other markets to rely on, the situation is worse for home-grown suppliers, including construction companies that are tightly locked to home building, cement manufacturers, design houses and furniture retailers.

Two-thirds of the major listed companies in these sectors reported falling profits in the first six months of the year, compared to the previous year, with half of them swinging from profit to loss.

Topping the victim list is Shenzhen-listed construction company Grandland Group, which relies on China Evergrande Group for 40 per cent of its sales. The company, which specialises in architectural decoration and building curtain walls, was among the most successful of its kind by market value before the property crisis.

In the first half of 2022, it booked a 236 million yuan net loss attributable to equity holders, excluding non-recurring costs, after a profit of 44 million yuan a year earlier.

“Our company has been suffering a liquidity crisis as we are having difficulties collecting receivables amid defaults at our biggest client, China Evergrande,” the company said in an interim result filing. “Meanwhile, amid the continuing fluctuations of the country’s real estate market, our new contracts have dropped sharply.”

Crippled by its close ties to China Evergrande – once China’s biggest developer by sales and now the biggest by debts – Grandland received a restructuring petition from a lender in May and agreed to enter a restructuring procedure to resolve its debts in August.

The market may see more such stories of deterioration, as the country’s real estate industry shows no sign of recovery.

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More than 20 major developers have defaulted on their unmanageable debts in the last year, while a public mortgage boycott that started in mid July has not helped the bruised sector.

“The worst part of this housing crisis is that it is still evolving, as there are so many businesses in the supply chain,” said Yan Yuejin, director of Shanghai-based E-house China Research and Development Institute. “Until we see things restored to order, including land sales, new project launches and home sales, more companies will struggle.”

Beijing Oriental Yuhong Waterproof Technology, once a sweetheart of some international investors including Fidelity and Allianz, also red-flagged possible challenges due to property market woes in a recent interim report.

“In the future, the company’s operation could be impacted by the downward pressure of China’s economic development [and] the macro control of the real estate industry,” the construction material company said after reporting a net profit decline of 38 per cent in the first six months of 2022.

In comparison, it posted a 40 per cent increase in the first half of 2021, before the housing sector collapse.

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Real estate and related activities, such as construction, account for about 29 per cent of China’s gross domestic product (GDP), comparable to the entire economy of Spain or Ireland before the global financial crisis, according to Kenneth Rogoff, an American economist and Harvard University professor.

As a result, a 20 per cent decline in real estate activity in China could lead to a 5 to 10 per cent drop in GDP, even without being amplified by a potential banking crisis, he said in a research paper last year.

“The demand of downstream clients has decreased sharply,” said Shenzhen-listed Guangdong Kinlong Hardware Products in its half-year report, as it logged a loss of 83 million yuan between January and June, following profits of 380.5 million yuan and 226.5 million yuan in the first six months of 2021 and 2020, respectively.

“If the property investment growth continues to drop, the company will continue to suffer from the negative impact,” said the company, which specialises in hardware for doors and windows of houses.

Aside from profits, the jobs of individuals like Gao are also in danger.

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At the end of 2020, real estate and construction jobs accounted for about 16 per cent of urban employment at non-private companies, such as state-owned enterprises and publicly listed companies, according to the National Bureau of Statistics.

“I posted a complaint on social media and some young people in other design houses sent me messages sharing their own stories of salary cuts and even lay-offs to comfort me,” said Gao. “How can I complain further? At least, I still have a job.”