As China's property giant Evergrande veers toward collapse, its unpaid debts spark protests

This aerial photo taken on September 17, 2021 shows the halted under-construction Evergrande Cultural Tourism City, a mixed-used residential-retail-entertainment development, in Taicang, Suzhou city, in China's eastern Jiangsu province. (Photo by Vivian LIN / AFP) (Photo by VIVIAN LIN/AFP via Getty Images)
This aerial photo taken Friday shows the Evergrande Cultural Tourism City, a mixed-used residential-retail-entertainment development, in Suzhou city in China's Jiangsu province. Construction on the project has halted. (Vivian Lin / AFP/Getty Images)

They came from all over the country, dragging cheap suitcases and clutching file folders filled with records, chanting in front of the glassy skyscraper: “Evergrande, pay up!”

They were the owners of small lighting and plumbing and construction materials companies, suppliers for Evergrande, one of China’s largest property developers — now staggering under more than $300 billion in debt and facing potential collapse.

Dozens of protesters were gathering daily here in recent days at Evergrande headquarters. Most were contractors who’d accepted commercial papers — a sort of IOU — as payment for projects, but now found Evergrande unable to pay when those IOUs came due.

“They say: 'We have no money. Do whatever you like,'” said Li Gexin, the manager of a janitorial company in Qingdao. It had 200 workers who’d cleaned Evergrande’s sales offices for a year and were owed more than $300,000 in commercial papers.

Police officers look at people outside the Evergrande headquarters
Police officers look at people gathering at the Evergrande headquarters in Shenzhen, China, on Thursday. The Chinese property giant said it is facing financial difficulties. (Noel Celis / AFP/Getty Images)

“If we don’t get the money, we can’t eat,” said Li, who’d driven for 24 hours to the Shenzhen headquarters. They needed that money to feed their families, send kids to school, buy medicine for elderly people and pay their own mortgages — to live, he said. Dozens of other suppliers gathered around, relating similar woes.

Legions of police bearing riot shields stood nearby. Some walked through the crowds with banners that read “Gathering Evidence,” and took photos of each person’s face.

The distress surrounding Evergrande’s crash is a window into the problem of bad debt in China’s housing sector. Property giants like Evergrande have boomed in the last few decades on a model of vast borrowing and fast expansion, relying on cash flows from apartments it would someday build to construct apartments it had already sold.

That worked as long as they could keep getting new loans for new projects, even as housing demand declined. But in August 2020, government regulators laid down new rules about how much debt developers could take on.

After a year of struggling to reduce its liabilities amid declining sales, Evergrande admitted in public statements this month that it may not be able to repay its debts. Credit ratings agencies Fitch, Moody’s and S&P downgraded Evergrande to levels indicating “in or very near default.” Its stock value has dropped 80% this year, and it has an estimated 1.4 million more homes that it’s already sold but not yet built.

People gather outside the Evergrande headquarters building while police watch
People gather at the Evergrande headquarters building in Shenzhen, China, on Wednesday. The Chinese property giant said it is facing financial difficulties. (Noel Celis / AFP/Getty Images)

Although the government is likely to step in to limit the fallout, “Evergrande’s collapse would be the biggest test that China’s financial system has faced in years,” said Mark Williams, chief Asia economist for Capital Economics, in an analysis this month.

It would hurt not only the developer’s creditors and investors, but also all those who bought unfinished homes, put their savings in Evergrande’s wealth management products or were among its contractors and subcontractors paid in IOUs.

Some of these suppliers had put up their own homes as collateral in loans to cover their work for Evergrande, confident that “such a big company” could not possibly fail to pay. Now they are under pressure from both the banks and their workers.

The entire construction supply chain had been using Evergrande IOUs instead of cash for years, said Cai, a supplier from Wenzhou who asked to be identified only by her last name.

When Evergrande was late paying the July commercial papers, she assumed that if the project she’d worked on was in trouble, the company would be able to transfer money from another Evergrande project.

“We thought, it couldn’t be that all their projects in the whole country are out of money. It’s not realistic, right?” she said. But suddenly no one wanted Evergrande’s IOUs anymore. They’d become “worthless pieces of paper,” she said. “Then we panicked.”

At the headquarters, police herded protesters toward a cafeteria on the fifth floor of a nearby building. There, Evergrande staff sat scattered at orange plastic tables labeled with the name of each province. Suppliers were encouraged to register their complaints with the staff, then promised that they could receive Evergrande properties — unsold apartments, commercial storefronts or parking spaces — at a discount to offset what the company owed them.

Policemen stand in formation at the Evergrande headquarters
Policemen stand in formation at the Evergrande headquarters in Shenzhen, China, on Wednesday. (Noel Celis / AFP/Getty Images)

Chen Xiaowang, the owner of a lighting company and electronics company in Wenzhou, sat at the Shaanxi province table. Evergrande’s Xi’an branch owed him more than $200,000, he said. He’d already had to lay off half his workers. The other day the staff here told him he could get parking spots in Xi’an, but when he called the office there, workers there told him they had not received instructions on that from their superiors.

A few hours later, he’d received a call from the local police in Wenzhou, he said, showing The Times the call records. They told him to go home and stop “making trouble” in Shenzhen.

“This isn’t the right way to do things,” Chen said.

Outside, several women sat against the wall on suitcases and pieces of cardboard. They had been here for four days, staying in low-budget hostels and eating one bowl of noodles per day.

Even if the parking spots and shop spaces were real, one of the women said, no one wanted them. Her name was Li, and she’d supplied decorative materials for Evergrande in Anhui province. They owed her more than $1 million, she said.

“We have four parking spots from Evergrande already,” Li said.

Another woman, a construction manager from Shandong who asked that her name not be used, agreed. She was owed more than $300,000 and had dozens of migrant workers waiting for payment at home. “I owe this worker $1,500 and that worker $750. Should I give each of them a brick? A toilet? A room?”

People walk by a map showing Evergrande development projects in China
People walk by a map showing Evergrande development projects in China at a city plaza in Beijing on Wednesday. One of China's biggest real estate developers is struggling to avoid defaulting on billions of dollars of debt. (Andy Wong / Associated Press)

Analysts expect that Chinese authorities will move to limit the damage to the economy if Evergrande defaults. The potential for social and financial instability would be too high at a time when the Communist Party is preparing for Xi Jinping’s transition to his third term next year.

“The most likely endgame is now a managed restructuring in which other developers take over Evergrande’s uncompleted projects in exchange for a share of its land bank,” and in which China’s central bank steps in with liquidity support, said Williams. Home buyers would probably be prioritized in that scenario, he said.

It’s less clear what would happen to the people who came seeking their money in Shenzhen.

“They sacrifice one group of people in order to save the majority,” said Ye Hong, 55, a clothing exporter from Ningbo who had invested his retirement savings of nearly $800,000 in Evergrande’s now-frozen wealth management products.

Ye had come to Shenzhen for the first time in his life hoping to get his investment back. But after trying to negotiate, seeing the police everywhere and hearing how much the others were owed, he wasn’t hopeful.

“I just trusted them too much,” he said.

Ziyu Yang of The Times’ Beijing bureau contributed research to this report.

This story originally appeared in Los Angeles Times.