China developer’s drastic action highlights battle for survival

AFTER a sweeping two-year crackdown on its debt-ridden property developers, China’s recent moves to shore up the sector are bringing some respite. But a slew of smaller builders are still struggling for survival.

A case in point is Sichuan Languang Development, a builder of residential buildings and offices based in the southwestern city of Chengdu. Languang has slashed about 90 per cent of its workforce since early 2021 and reported an accrued loss of 11.7 billion yuan (S$2.3 billion) as of the third quarter of last year. It’s been selling off assets as it fights to stay afloat, and 27-year-old chairman Yang Wuzheng has approached dozens of larger real estate companies and other potential investors in search of a bailout-so far, without success.

“Essentially, a lot of us are trying to win time,” Yang said. Currently, his goal is simply to “hold our team together while exploring a way forward-whether that will be restructuring, strategic investment or a market turnaround”.

Since mid-2020, policymakers have sought to reduce the risk of a property bubble with measures such as lending limits for banks and curbs to restrict borrowing by developers who fail to meet strict financial targets. For many small and mid-sized companies, these moves have been especially brutal.

“China’s property market is quite fragmented, so the smaller players are also crucial to the health of upstream and downstream sectors and economic growth,” said Zerlina Zeng, senior credit analyst at Creditsights Singapore. “Some regional players were key participants at local land sales, and thus are important to local governments’ fiscal conditions.”

As lines of credit became increasingly difficult to access and home sales slumped in the shadow of Covid, many developers-industry giant China Evergrande Group included were forced to miss repayments or to halt construction on some projects.

Languang is among the companies that have had to do both.

Like many Chinese property companies, it’s a family business. Growing up in Chengdu, Yang watched his father make the most of the country’s soaring property market, transforming Languang from a small auto-parts manufacturer into a real estate-focused conglomerate.

Yang succeeded him as chairman in June 2021-just weeks before the company defaulted on a debt payment.

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“After our default, we had around 100 housing projects that were stalled in over 70 cities,” said Yang, who seems years older than his true age and maintains his composure even when describing a crisis.

“It was a deadlock, stakeholders want to cut their losses.”

Widespread turmoil

Languang’s shares have fallen by more than half since its default. And across the sector, the turmoil has been far-reaching: A Bloomberg gauge tracking Chinese developers’ stocks has fallen more than 40 per cent over the past two years while an index of high-yield dollar bonds dominated by builders had its second-worst year on record in 2022.

Years of high leverage and high growth taught entrepreneurs like Yang’s father to bet big. His story of a family rising from modest origins to substantial wealth on the back of the property boom is common to many of his generation. But that route to prosperity seems to be closed.

Now the Chinese government has lowered the systemic risk presented by the likes of Evergrande, it is stepping up efforts to calm the property sector’s turmoil. In November, it rolled out a 16-point plan to ease liquidity issues in the sector and last month hinted there would be more support to come. Traders piled back into the sector, causing the stock gauge to surge more than 50 per cent over the past two months.

The government’s priorities are ensuring that unfinished homes are completed, after a spate of protests last year, and supporting high-quality developers.

But more embattled businesses will need to lift themselves up even as China’s economic growth slows and consumer sentiment remains weak in the wake of Covid Zero.

“We are still struggling to survive but there is light at the end of the tunnel,” Yang said. “For the sector, I think a policy trough has come. The future will be about working with relevant authorities to seek some rescue.”

Way forward

Yang describes feeling overwhelmed by his company’s challenges.

Of the thousands of staff to leave Languang, many have abandoned the property industry altogether. Some have opened restaurants or become ride-sharing drivers, while others are retraining or remain unemployed. The departures included several senior managers, some of whom have succumbed to depression.

To control costs, little things now matter. Documents are printed on both sides, offices are only air-conditioned part of the time and lavish banquets with creditors a common feature of doing business in China-have become a rarity.

Still, Yang says the company has restarted more than 90 per cent of its stalled housing projects with the help of local government mediation.

City officials brought various stakeholders to the table to negotiate how to complete the work. For instance, builders must finish one floor of a given building before they get paid; they only start work on the next floor once payment has been received.

The developer has about 400 active projects in total.

Yang sees Languang’s best way forward as a complete restructuring.

“If we stay in the property sector, the path forward will be building a boutique shop pursuing quality growth,” he added. But if Languang succeeds in finding a strategic investor, “we may switch our business according to their needs”.

“The old days are not coming back and rightfully so,” he said. He believes the property bubble would have burst eventually even without the government’s deleveraging campaign.

Evergrande, the highest-profile casualty of the crisis, has vowed to repay debt in 2023 after repeatedly delaying its much-anticipated restructuring plan. And more consolidation in the sector seems likely, according to Chi Lo, senior investment strategist at BNP Paribas Asset Management Asia, “as weak developers exit the market and state-owned developers play a bigger role”.

In the longer term, China’s property sector will remain important but “play a smaller role in driving the nation’s GDP growth as it abandons quantity growth for quality growth”, he said. BLOOMBERG