Chinese Real Estate Developers Flee Debt

March 12, 2012 Updated: April 29, 2012

With the real estate market downturn and a tight lending policy imposed by the central Chinese regime, developers in China’s mid-sized and smaller cities are increasingly unable to continue operating. Some have chosen to flee, taking what cash they have left, and leaving their unfinished projects and debts behind.

According to media reports, since August of last year close to ten real estate developers in Changsha City, Hunan Province have abandoned their businesses and fled. They include Jiangbin Homes, Zhongyuan Residence, Dongfang Navigator, Zhongyang Residence, Keke Little City, Lipujin Cubic, and Xiangjiang 700.

Authorities in the provinces of Henan, Jiangsu, and Zhejiang have also reported about developers fleeing with large sums of money.

Most recently, the president of Yuyang Enterprise in Nanjing City, Jiangsu Province took several hundred million yuan of loan money and disappeared overnight.

Chen Fei, a millionaire developer in Zhijiang Province, abandoned the Shengli Square development project and fled with over a million yuan.

Several heads of a real estate development firm in Anyang City, Henan Province disappeared with a large sum of money that was allegedly raised illegally.

These developers all faced capital shortages, according to the reports. Since last year’s lending tightening policy imposed on banks, developers had to turn to private and underground loan suppliers. With money supplies dwindling and under the burden of high interest private loans, these developers have taken flight as their only debt-management option.

Experts believe that more and more small and medium-sized developers will face this dilemma.

Shi Wei, a financial planner at Bank of Communications, one of China’s oldest banks, told The Epoch Times that many small and medium-sized real estate developers had raised enough funds, or had obtained some bank loans, to start construction when the market was hot. But with the central government’s tightened money lending policy, these developers could no longer get bank loans to continue their construction projects. Coupled with weak sales, it led to a finance crisis, and has now resulted in developers abandoning their debts.

Shi predicted that in the current tight money environment, more small and medium-sized developers will fold.

“Even though the banks do have the financial muscle, the regulation would prevent banks from loaning money to medium and small-sized developers. The big developers are little affected by the policy because they either have obtained financing or they own enough resources. It is the small and medium developers that are most affected,” he said.

Loans Due

The first quarter of this year will be an intense debt repaying period for real estate developers, according to a report by World Union Properties, a major Chinese real estate research and consultancy group. Loan debts totaling over one trillion yuan are due this month. They include bank loans, trust loans, private equity loans, private and foreign lending, and most of them are high interest loans.

Research data by Guotai Junan Securities, one of China’s largest securities firms, shows the total debt due in 2012 as 175.8 billion yuan, with the first quarter payments of 36.6 billion yuan due in March. The second, third and fourth quarter payments due are 36.8 billion, 71.6 billion, and 30.9 billion yuan, respectively.

The debt pressure in the real estate development sector is quite prominently reflected in these numbers.

The Fitch Group said in a 2012 real estate report on China that China’s real estate industry is likely to face stricter regulations this year, and smaller developers will experience more pressure.

Local Government Debt

Shanghai and Wuhu have previously tried to loosen regulations in the real estate industry but it was abruptly halted. This may be because the money crunch is not only hitting the real estate sector, but extends to local government as well, as the two are enmeshed.

The central Chinese regime is now putting the squeeze on local governments to repay the bank loans they borrowed during the 2008–2009 financial crisis, about US$1.7 trillion. At that time the central regime encouraged heavy borrowing by local governments to stimulate infrastructure projects and boost economic growth, New Tang Dynasty (NTD) Television reported on March 6.

Last week, at a news conference during the National People’s Congress, Chinese Finance Minister Xie Xuren, said: “We ordered local governments to do a good job in repaying their debts. In terms of the governments’ debts, local governments need to set up debt repayment funds to use all their fiscal resources available to repay their debts.”

If debt-ridden local governments default, Chinese banks will be stuck with a mountain of bad loans, and the country could be thrown into financial instability. According to analysts, roughly 20 percent of loans, worth three to four hundred billion dollars, may have gone bad, NTD said.

Asian economics analyst, Jim Walker recently said China’s economy is already in deep trouble. Walker told Reuters: “Our view is that China is in the middle of a hard landing. Its property sector is in deep trouble, its capital goods industry needs to be reduced in capacity terms, and there’s no consumption that can really pick up the steam.”

Read the original Chinese article.