In Depth: Mounting Debt Defaults Fuel Crisis in China’s Construction Industry

China’s construction industry is grappling with major financial issues, as delayed payments and rising bad debts destabilize the sector. Traditionally bolstered by a robust real estate market, construction companies now face an environment of shrinking liquidity and unpaid bills [para. 1]. Xi’an Construction Engineering Group Co. Ltd., a state-owned enterprise in Northwest China, exemplifies the crisis, having defaulted on a 263-million-yuan ($37 million) bond last month after a series of credit downgrades [para. 2]. Many firms are increasingly forced to accept unsold or unfinished properties as payment, amplifying the non-performing assets on their balance sheets and causing smaller private firms to collapse, while even larger state-owned enterprises are resorting to layoffs and bankruptcy [para. 3].

Xi’an Construction’s default represents a significant red flag as it is the first to miss a bond payment in the open market. Experts warn of potential future defaults within the industry, which has seen major firms enter bankruptcy or liquidation in the first half of 2024 [para. 4]. The company, restructured in 2017 to include private shareholders, saw initial growth with revenue surging from 18.7 billion yuan to 43.4 billion yuan between 2018 and 2021. However, problems escalated in May 2023 with the delay in repayment of commercial notes, followed by missed payments by its subsidiaries [para. 6]. By March 2024, its credit rating had been downgraded significantly due to overdue bills and declining external financing [para. 7].

Xi’an Construction's financial troubles are exacerbated by its dependence on Greenland Holding Corp. Ltd., a struggling Shanghai-based developer. Xi’an Construction holds nearly 10 billion yuan-worth of contracts with Greenland, which has faced its liquidity crisis since 2022 due to declining property sales exacerbated by pandemic-related lockdowns [para. 9]. As a result, Xi’an Construction’s revenue plummeted to 14.2 billion yuan in 2023, a significant drop from 2021 levels [para. 10]. Additionally, the company’s exposure to the financially troubled China Evergrande Group creates further financial vulnerabilities [para. 12].

The strain on construction companies is also exacerbated by delayed payments in the broader industry. Developers’ delays have become the norm, and even financially stretched local governments contribute to the backlog of unpaid receivables, affecting both state-owned and private contractors [para. 18][para. 19]. The resultant "triangle of debt" where developers, contractors, and suppliers fall into interconnected debt traps has worsened since the real estate market downturn [para. 20]. This issue is highlighted by Central China Real Estate Group Co. Ltd.’s legal struggles post-default in 2023 [para. 22].

The downturn in the construction industry has cascading impacts on related sectors like raw materials (steel, cement) which report drastic profit drops, and industries such as furniture and home appliances which saw sales declines [para. 29]. Consolidation is occurring within the industry as private firms face higher default risks and reduced opportunities, while central state-owned enterprises gain market share and benefit from lower financing costs [para. 32]. The industry's total contract value fell by 2.85% in 2023, bucking a trend of growth since 2016 [para. 33].

Amid these challenges, construction firms are turning to international markets, achieving a 9% rise in new overseas orders in the first half of 2024, contributing 8% to total industry revenue. However, global competition is likely to squeeze profit margins further [para. 40]. Companies are also pivoting toward innovation, with entities like China State Construction employing new technologies and materials to enhance efficiency and explore emerging sectors like renewable energy [para. 43].

In summary, the once-booming Chinese construction industry now faces severe financial turbulence marked by defaults, unpaid debts, and delayed payments, necessitating structural changes and innovative approaches to survive and thrive. [para. 1][para. 2][para. 3][para. 4][para. 6][para. 7][para. 9][para. 10][para. 12][para. 18][para. 19][para. 20][para. 22][para. 29][para. 32][para. 33][para. 40][para. 43].